Time to Rethink Remuneration

16 December 2016

Over the past 20 years, our approach to remuneration has changed. Up until the mid-1990s, multi-faceted remuneration packages that included salary and the provision of an array of benefits such as a company car, medical insurance, home phone reimbursement, and in many cases, 1:1 superannuation, were prevalent in the executive workforce. In fact, some of them, such as subsidised medical insurance and superannuation, were benefits enjoyed more widely, particularly in the private sector.

Changing Times

When tax changes, such as the introduction of fringe benefit tax and the removal of the ability of companies to expense their contribution to superannuation schemes, came into force, employers mostly went with them initially. However, slowly but surely, attitudes began to change. A lot of this change meant that companies started to move away from that wide range of multi-faceted benefits, and towards remuneration packages consisting mostly of cash. This left it to the individual to decide how to save or what type of medical cover they needed, if any. This notion of freedom of choice was seductive.

It also removed the burden for companies of managing the administrative aspect of these schemes and benefits, which to be fair were not inconsiderable. This general approach to remuneration is still largely in place today, with the exception of the introduction of Kiwisaver, which also attracts a tax credit. Nevertheless, one could argue that the overall approach is still utilitarian when compared to the practices that preceded it. Others might argue that the old approach was akin to telling people how to manage their lives.

Since the mid-2000s, workforce engagement has become the focus of many employers – to the point where some organisations are regularly conducting surveys to monitor the workplace satisfaction of their employees. However, in this age where CEOs routinely list the identification and retention of talent and skilled workers in the top three concerns they have for their business, can remuneration actually play a part in solving it?

Remunerating to Engage

Remuneration that is largely made up of cash resembles, at a simple level, a monetary exchange for services or labour. On the surface, it does little to engender a deeper relationship between the employer and employee, which is crucial to positively influencing employee engagement. By adopting a broader approach to the concept of remuneration, and including items such as medical insurance (of some level), matching an employee’s superannuation contributions when they are above 3%, and providing an amount of life cover (say equivalent to 1 to 1.5 times the employee’s salary in the event of death), could show that the employer has an interest in their employees beyond the exchange mentioned above.

When an employer shows that they have a deeper interest in the well-being of the employee, it’s a lot more likely that this interest is reciprocated, which can result in higher levels of engagement and commitment. In fact, a survey conducted in the USA showed that 68% of workers who were satisfied with their overall benefits package, were also satisfied with their job; compared to just 5% of employees who weren’t satisfied with their benefits package.

Building this kind of relationship with employees also has wider-reaching benefits. For one, those close to the employee outside of work will also have a stronger vested interest in them being happy at work, meaning that you improve your reputation as an employer and an organisation beyond just one person. However, engagement also results in more productivity, which results in happy customers, which results in happy shareholders. This ‘Employee-Customer-Profit’ chain was first mooted in an HBR article back in 1998, and is still relevant nearly 20 years later. Although we all now recognise the importance of engagement, the power of comprehensive remuneration packages being able to contribute to that and strengthen the employer/employee relationship, is all too often overlooked. As with many other aspects of the workplace, when it comes to remuneration, a one-size-fits all, cash-first approach, may not be the best way forward.

Closing Thoughts

Ideas come and go. Some come around again. An idea losing its lustre does not necessarily mean it is a bad idea. Perhaps, in our renewed focus on employee engagement, we have forgotten the power remuneration holds to drive high levels of commitment and satisfaction in the workforce. Although that engagement is key, it is timely to rethink our elegantly straightforward approach to our thinking on remuneration. Being open to providing a wider array of benefits may well assist you in truly getting the message across that you care about your people.

This would certainly be helped by a change in government thinking on the application of fringe benefit taxes to medical insurance, and enabling employers to fully expense their contribution to superannuation, while requiring them to match the employee’s contribution up to 6%.

Lastly, a word on the good old company car. As reported by Stuff in June 2015, the average age of motor vehicles in New Zealand has passed 14 years and is likely to increase, largely driven by imports. Allowing companies to supply new vehicles, which don’t qualify for exemption under the current rules, as a benefit up to a purchase price of $45,000 (thereby ruling out the provision of “luxury” cars) could serve to refresh the supply of good, well maintained second hand vehicles on to the market that also have a known history, contributing to reducing the age of the overall vehicle stock and presumably putting safer cars on our roads.

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