To work out the total value of your remuneration package, take your basic salary and add your employer’s contribution to your retirement fund, including what your employer contributes to group risk benefits (life cover and income protection), plus all your employer’s other contributions, such as subsidising your medical scheme contributions and a travel allowance. You must also add a 13th cheque or bonus, if you are contractually entitled to one, plus any overtime and extras that you receive, such as an interest-free loan. All of this makes up your cost to company.
Eric Jordaan, a director of financial planning company Crue Invest, uses the following example to explain how you can end up worse off if you move to a job with a higher basic salary but without employee benefits.
Stan is employed by Company A, where he earns a basic salary of R40 000 a month and receives a number of employee benefits. Company B offers Stan a job with a basic salary of R45 000 a month, but without employee benefits.
If Stan accepts Company B’s offer, his net income will increase from R26 393 a month to R26 524 a month. This is a negligible increase in the context of what it will cost him to replace his lost benefits.
Jordaan’s example (refer to this table) assumes that Stan’s employee benefits are:
• Compulsory membership of a pension fund, to which Stan must contribute 7.5 percent of his basic salary.
• An employer contribution of 5.5 percent of Stan’s taxable income towards the company-sponsored pension fund. Stan’s employer contributes a further two percent of his taxable income to cover the cost of administering the fund and to pay for group risk benefits.
• Group risk cover provides Stan with life cover equivalent to twice his annual salary (that is, R960 000) and an income protection benefit of R30 000 a month until age 65. (Companies that offer group risk cover normally provide a death benefit of twice your annual income plus an income protection benefit of 75 percent.)
• A 50-percent subsidy of Stan’s medical scheme contributions. The option to which Stan belongs costs R4 278 a month for his family.
For Stan to work out his cost to company, he must take his basic monthly salary of R40 000 and add 7.5 percent of this amount (R3 000), which is what his employer is contributing to his pension fund, including group life costs. He must also add the R2 139 that his company is contributing towards his medical scheme contribution. So, Stan’s cost to company is R45 139.
If Stan accepts Company B’s offer of a basic salary of R45 000 a month, he’s moving jobs for a slightly higher salary. However, he needs to consider that risk cover will cost him more. Jordaan says that life cover of R960 000 and an income protection benefit of R30 000 a month will cost Stan R580 a month, assuming that Stan is healthy and will be able to replace his cover at standard rates.
“The premium of R580 a month is based on an actual quote from a major insurer for this particular profile of person. If you have any health issues or illnesses, this premium would naturally be loaded, or exclusions may apply,” Jordaan says.
From Stan’s R45 000, he will have to pay R4 278 to cover the full contribution to his medical scheme, plus R5 200 to cover the full cost of saving for retirement (meaning, the 7.5 percent he was contributing, plus the 5.5 percent that his employer was contributing), plus R580 a month for risk cover.
Jordaan says that people in Stan’s position usually stop saving for retirement and spend the money on their lifestyle. But when it comes to retirement, they are woefully unprepared. According to the Financial Planning Institute, only six percent of South Africans can maintain their standard of living during retirement.
People often think that they could make more money working for themselves, but forget to add their employee benefits, including paid leave of 15 or 20 days a year, plus sick leave. The self-employed person needs to make enough extra money to fund these expenses – or the cost of being off work, Jordaan says.