Cost of Living and Remuneration


Cost of Living 2011

When I received yet another email from a disengaged employee, working in a different company about their pay, I decided that it deserved some consideration.

The economy is posting better numbers and many companies have a healthier bottom line (small miracles after “resizing” their operations and workforce last year). Government is plodding along and the municipal elections went off smoothly. Employment levels are up. We should be happier.

Cost of Living, going up and up

Except for the cost of living. Raise your hands, if you believe that the cost of living is outstripping the growth in your remuneration. From January to May, we have seen steep increases in fuel prices, electricity and coming-to-a-highway-near-you, absurd toll fees. Or does the high cost of living feel that way because we don’t budget, mismanage our finances and love spending on credit?

Maybe the tenderpreneurs know something about the spiraling cost of living that we don’t: in the past corruption was in the hundreds of thousands, now they wipe millions from the coffers in one tender. They need millions to maintain the same lifestyle that they were accustomed to in the time of five rand notes. Inside the corporate jungle, executives are also negotiating in the millions, compensating for negligible increases in the past two years. Even the rich are worried about their retirement nest egg and holiday home.

For those outside these dark and elite circles, they should be monitoring their guaranteed pay and the remuneration structures behind it. Like a hawk.

During the 1970s and 1980s, the battle between employers curbing employment costs and employees pushing the lid up, was partly settled by structuring their package.  Something about paying the minimum tax, then paying less and getting away with it. Not that it was necessarily illegal.

Cost of Living & Remuneration Structures

Under the traditional package, the employer paid a basic salary plus add-on components. The employee went on a shopping spree in the candy store, filling the package with different tax sweets. From strawberry flavoured allowances and benefits to sugary contributions and perks, it was too sweet to last forever. On a monthly basis, the employee paid less employees’ tax and pocketed the higher net pay. Upon assessment, the employee easily deducted their fictitious business expenditure against taxable allowances and banked a tax refund.

When employers wanted to reduce their employment costs in the 1990s, they turned to the (in)famous salary sacrifice schemes. The employee accepted a reduction in their basic salary in exchange for a sugary contribution. Again, the employee scored higher take home pay, so the sacrifice seemed a fair trade. Today, I still come across employers that carry the legacy of salary sacrifice schemes, especially 2.5% retirement fund contributions.

As SARS woke up, they systematically removed the tax sweets from the candy shop and went after the owners, with crushing penalties and interest. To minimise their tax risks, employers converted their traditional and salary sacrifice schemes to total cost packages. Under this structure, the employer set aside a guaranteed sum of money to spend on the position. The guaranteed sum was allocated to earnings, allowances, benefits and contributions. Many employers also used the conversions to transfer the economic risks, related to the retirement fund and medical aid to employees. But they didn’t explicitly tell them so, Rather, employers, together with their consultants convinced staff that total cost packages, were good for their lifestyle choices, threw some tax sweets for the pocket and mumbled “best practice” to cover their tracks.

Cost of Living & Taxation

Fast forward to 2011: the taxation of employment income has dramatically changed to the point where the salaried employee is unlikely to derive a net take home pay benefit by adopting one remuneration structure over another. Those long standing tax sweets, medical aid contributions, travel allowances and company cars, come in sugar free and sour versions. SARS won’t be picking up the bill for high incomer earners.

But cost of living is going up. Employees want more. The employer can’t legally structure the package to significantly bump up net pay. As the economy strengthens, employees, especially the stars, will be seeking employers with richer offers.

Get there early by overhauling your guaranteed pay and remuneration structures. The finance and HR team should be working together to manage employment costs, without prejudice to the star players. Reward them handsomely. You don’t want them to be worried in the office about their cost of living.

What do you think about the cost of living in SA?

(HR Future, June 2011)


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