How is your employer benefiting you?

Employees, with or without the backing of trade unions, often engage with their employers in salary and wage negotiations at the end of the year. But when it comes to employee benefits, do you know what to ask for and why? Laura du Preez reports

Salary negotiations are likely to be tough this year as the weak economy squeezes company profits.

Negotiations over pay should not focus only on the cash paid into your bank account; company benefits also need to be considered.

If you are fed up with your employer and are thinking of changing jobs, or becoming a freelancer or a consultant, or opening your own business, you need to know what your company benefits are worth.

According to the BankservAfrica Disposable Salary Index, which measures salaries deposited into South African bank accounts, average salary growth over the year to September declined slightly to 6.6 percent, from 8.6 percent last year. Bankserv says the figure was higher last year, because civil servants were receiving large backpayments of salary increases negotiated in May.

“Salaries are still up by nearly two percent in real (after-inflation) terms, as inflation remained steady at 4.6 percent in September,” Dr Caroline Belrose, the head of fraud and data analytics at BankservAfrica, says.

Although employment may be under pressure, salaries paid into South Africans’ bank accounts show that increases are still relatively good, given the poor economic conditions, she says.

The typical salary increased by eight percent over the past year, and the data shows that increases were higher in the middle of the salary spectrum, at 3.2 percent in real terms, Bankserv says.

Martin Westcott, the executive chairman of PE Corporate Services, says although a number of companies are not increasing salaries to avoid retrenchments, others are adjusting salaries by about six to 6.5 percent.

PE Corporate Services conducts a survey among about 900 employers representing all sectors of the economy and including listed companies, private companies, multinationals, subsidiaries and small to medium enterprises.

When it comes to benefits, Westcott says most employees are extraordinarily lax about working out what their package is worth.

Most employers – some 55 percent – remunerate employees on a cost-to-company basis, which gives employees some flexibility on how to structure their pay package, he says. In the past, there were tax advantages to doing this, but now the main advantage of a cost-tocompany package is that you can structure your employee benefits to suit your needs.

Rob Cooper, the director of legislation at Sage VIP, a provider of payroll services, says the advantage for employees is that they sacrifice salary only for what they need, while an employer can ensure there is pay parity between employees. There is a steady uptake of these packages, which can be restructured annually, he says.

Structuring your benefits to suit your needs means that if, for example, you are young and single and need only basic medical scheme cover and no death benefits, because you do not have dependants, you can reduce these benefits. An older employee with a family who needs more medical scheme cover and death benefits, however, can take higher benefits and a lower salary.

Typically, increases on cost-tocompany packages are awarded on the entire package without taking into account the increase in the cost of benefits – for example, medical scheme contributions rise at a higher rate than inflation. However, Cooper says some employers do structure package adjustments to take account of the increase in the cost of the benefits.

Here are few things you should know about your employee benefits: Many employees do not know the absolute value of their employer’s contribution to a pension fund, provident fund or group retirement annuity (RA) fund.

Changes to tax legislation, which are expected to be implemented next year, will make it easier for you to see what your employer is paying on your behalf, because the amount will be stated on your salary slip as a taxable fringe benefit.

In addition, the tax deduction for retirement fund contributions will change, so now is a good time to negotiate an improvement in your contributions with your employer.

Currently, your employer can deduct from its taxable income up to 20 percent of your retirementfunding income for contributions to a retirement fund or medical scheme. The limit on this deduction for employers will be removed from March 1 next year.

From that date, your employer’s contribution will be added to your income as a taxable fringe benefit, and the contribution made by you and your employer together will be tax-deductible for you up to 27.5 percent of your remuneration or taxable income. The effect on your income should be neutral or beneficial once the higher tax deduction is taken into account (particularly for RA fund members and provident fund members once the full deduction is allowed).

For most members, the change means the tax deduction will not only be higher, but will also be calculated on a higher income. As a result, for most employees, either they or their employers will be able to contribute more and deduct more with the same after-tax result as under the current tax regime. Many employees have assurance against death, disability and severe illness through group cover provided by an employer or a retirement fund.

If the benefit is provided as a result of your membership of a retirement fund, it is called an approved benefit.

You may not know what your company pays for group life benefits on your behalf. This is also set to change in March next year, when the contribution your employer makes on your behalf for this benefit will become a taxable fringe benefit (in the same way that retirement fund contributions will become a fringe benefit), which can be deducted up to the new limits.

Until then, you can ask your retirement fund to advise you how much is being paid on your behalf.

If your employer pays for life cover for you by way of an unapproved fund or benefit, it will be added to your income and taxed as a fringe benefit.

Approved and unapproved benefits are taxed differently when the premiums are paid and when a claim is paid. An approved benefit paid to you is taxed in the same way as your retirement fund benefits:

◆ Lump sums up to R500 000 are tax-free, and amounts above that are taxed at rates from 18 percent, depending on the amount; and

◆ Monthly annuity payments are taxed at your marginal rate of tax.

Unapproved life benefits are paid to you tax-free, because the premiums were not tax-deductible.

Group life cover is typically priced for the group (employees or retirement fund members) and the older you are and the more health problems you have, the more you will pay to take out the equivalent life or disability cover in your own name if you decide to work for yourself, or for an employer that does not offer this benefit.

The Member Watch survey of employee benefits by Alexander Forbes, the largest retirement fund administrator in South Africa, shows that more than 98 percent of employers offer group life cover and more than 82 percent offer disability income benefits. Over 62 percent of employers provide funeral cover as a benefit, while less than five percent of employers offer dread disease cover.

Lump-sum disability and death benefits are typically offered as multiples of your salary, with employers choosing whether this is your full salary or your retirementfunding income. The lowest multiple is one times salary and the highest is eight times salary. Westcott says medical scheme subsidies are still widely offered: 65 percent of the organisations surveyed make it compulsory for employees to join a medical scheme, 23 percent offer membership of a medical scheme as a voluntary benefit and 12 percent offer a combination of voluntary or compulsory membership.

He says medical scheme subsidies are typically 50 percent of the contribution rate, and contributions paid by both the employee and the employer are between seven and nine percent of the total payroll of the companies surveyed.

If you leave an employer that offers a medical scheme subsidy for one that does not, remember to take into account the loss of this benefit to you, even if you become a dependant on a spouse’s medical scheme. Unless your spouse receives a 100-percent subsidy, your spouse’s take-home pay will reduce by whatever portion of the contribution he or she has to pay to include you as a dependant on his or her scheme.

If your employer has set a rand amount for medical scheme contributions and increases this amount annually by the percentage at which your salary increases, or at the inflation rate as measured by the Consumer Price Index (CPI), your take-home pay may quickly decrease in real terms. This is because, on average, medical scheme contributions are increasing by four percentage points above inflation, whereas salary increases are generally equal to, or only marginally above, inflation.

Only 25 percent of the organisations surveyed by PE Corporate Services provide postretirement medical scheme subsidies. Westcott says most new employees are not offered this benefit.

A post-retirement medical scheme subsidy that is related to the cost of the contributions is a valuable benefit for employees because of the higher-than-inflation increase in medical scheme contributions and because retirees have to join expensive comprehensive options to increase their healthcare cover. Westcott says a travel allowance is the most popular benefit for employees who travel for work purposes and is favoured by employers over a company car.

Cooper says you, as an employee, should be wary of regarding a travel allowance as a benefit. The allowance enables your company to reimburse you for the cost of using your vehicle for work purposes, which is a business cost for which you are paying.

You pay tax at your marginal rate on a travel allowance against which you do not claim a tax deduction, so there is no point receiving an allowance that is much higher than your business-related travel claims. The number of employers that offer a housing subsidy has declined from about 40 to 50 percent of employers to only 14 percent, PE Corporate Services’s latest survey shows.

Any part of a housing loan your employer pays on your behalf is fully taxable as a fringe benefit.

The exception is if you earn less than R250 000 a year, the market value of the property you acquire is below R450 000 and you are not connected to your employer in any way (for example, a family member). Westcott says the trend with bonuses is to offer them as an incentive for your performance at work rather than as a 13th cheque.

The key performance indicators that you need to achieve should be clearly defined, and if you have influence over the company’s profits or earnings per share, these criteria may be used to measure your performance.

Cooper says some employees with a cost-to-company package sacrifice some of their monthly salary to receive a 13th cheque at the end of the year. One benefit of being employed is that your company may spend money on training you.

Westcott says companies are spending a lot on in-house training, because the quality of education is declining. This benefit is difficult to quantify, and you won’t see it added to your salary package.

The benefit will be more quantifiable if your employer provides you with a bursary to study. This benefit will be tax-free if it is granted on condition that you must pay the fees back to your employer if you fail to complete the course.