My business is focused on advising employers on how best to structure their compensation and benefits programs in developing and high-growth markets. We have particular expertise in Africa, where our compensation and benefits surveys cover all 54 countries.
Recently, I helped conduct an employer roundtable for clients in South Africa, focused on fast growing African markets. It was a lively and informative discussion, but one of the charts we looked at stands out: A comparison of the pay mix across 20 different African markets.
You can see there is wide variation across the featured markets in how employers design their pay packages. Base salary is at least 60% of the total package in most countries, but the pattern is not uniform. That’s why it’s important to watch your A-B-C’s — Allowances, Benefits in-kind and Cash.
We are often asked by clients why the pay packages in Africa are so complicated? Why can’t they just pay cash and be done with it?
There are several reasons for the widespread use of cash allowances and benefits in-kind. Here are some to think about:
- Benefits are provided for critical business reasons – for example, a commuter bus is needed to ensure workers can go to and from the office on time. In some countries, the lack of reliable public transportation, coupled with traffic congestion and the high price of shared taxis is a real hardship for workers. So the company steps in. Similarly, companies sometimes provide in-house medical clinics, free or subsidized meals, and even access to credit.
- Historical reasons – many cash allowances used to be treated differently for tax purposes, providing a small advantage to staff through higher net income. Most of the special tax treatment is long gone, yet the practice of providing allowances such as 13th month or rep allowance persists.
- Statutory requirements – certain allowances or benefits are mandated by local labor law, so there is no choice but to provide them.
- Cultural reasons – a company car is a status symbol in many countries, and even if there is no advantage compared to cash, the car continues to be popular. Why? Well, your friends and neighbors can see the car in the driveway, but they cannot see the cash in your wallet!
- To save the company money – Really? How can a company save money by providing extra allowances or benefits? If an allowance is paid just once a year at the end of the year, the company has essentially an interest-free loan from employees for the first 11 months of the year.
We know employers benchmark their total compensation package against the market. The total compensation is a fixed pie that simply gets divided up according to each employer’s policies. Adding a new benefit or allowance usually means reducing other components, including cash, so that the total is still aligned to the market. It’s a zero-sum game, actually.
Our experience working with employers in developing markets in Africa and elsewhere around the world indicates that employers need to pay careful attention to their pay mix at all levels of the organization. If you focus just on cash, you will fall short in the eyes of your employees, even if the cash has been adjusted to “make-up” for benefits and allowances you decide not to offer.
Ironically, one of the most challenging aspects of compensation administration in these markets is reward communication. Many employees don’t fully understand what they get, why they get it and how the company calculates their packages.
So my advice is two-fold:
- Be sure you have a competitive mix of cash, allowances and benefits in-kind, and that your “A-B-C’s” are aligned to the market and your internal policies and strategies.
- Communicate, communicate, communicate. Make sure your staff understand their pay packages in total, not just their paycheck. Focus on total rewards in your explanations.
Warren joined Birches Group in New York as a partner in 2007, following a long career in Compensation and Benefits at Colgate-Palmolive. He held the position of Director, International Compensation for 10 years immediately prior to joining Birches Group. Warren has broad experience working across the globe with clients on local national and expatriate compensation projects. He leads our Business Development and Client Services teams and manages our strategic partnerships around the world. Warren previously held leadership positions for the Expatriate Management Committee of the National Foreign Trade Council and was president of the Latin America Compensation and Benefits Forum.