Traditional and total cost packages 101

Content provided by a guest contributor.

As a small business owner, negotiating remuneration packages with your employees is integral part of your role, but what is the best way to approach remuneration? Here are some of your questions about remuneration packages answered:

1. What is a Traditional Remuneration Package?

The Traditional Remuneration package consists of a basic salary plus company contributions, allowances, and benefits.

2. What is a Total Cost Package?

A total cost package is a method used by an employer to remunerate an employee based on a package, being the guaranteed sum of money the employer will spend on that position. The guaranteed sum is allocated by the employee to earnings, benefits, allowances and company contributions, subject to various regulations.  

3. What is excluded from a Traditional and Total Cost Package?

  • Variable pay
  • Reimbursements
  • Statutory charges such as UIF and SDL

4. My business has a traditional remuneration package and wants to convert to a total cost package. Will it work?

There are various reasons for converting from a traditional remuneration package to a total cost package, including: attracting talent, cost control, transfering economic risk, tax compliance, internal equity, external factors, and competitiveness. While Total Cost Packages may have provided benefits in the past, today it is:

  • Unlikely to attract and retain talent
  • Conceptually unsound from a reward position
  • Not automatically tax compliant or tax efficient
  • Limited in practice
  • Potentially a source of internal pay inequity

If your organisation is planning to convert to it, the business case for total cost packages is on thin ice.

5. Can I structure the remuneration package to increase the net take home pay for the employee, without having to pay them more?

Over the years, various changes in tax legislation, have whittled away the opportunities to structure packages for a tax benefit. In the event of an employees’ tax audit, the employer could be liable for the under deduction of employees’ tax, penalties and interest.

The content in this article was provided by Yusuf Mahomedy, CA(SA). Yusuf is an accomplished, passionate executive, with expertise in finance, HR & technology. Distinguished track record of translating strategy into operational outcomes.

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