Every first-time employee has aspirations and visions as to how they will spend their first month’s salary.
Young employees are, however, often disappointed by the actual rand amount which reaches their bank account – even after they believed they had negotiated a competitive remuneration package.
This is according to André Lindeque, a consultant at wealth and financial advisory firm GTC, who said many first-time employees find themselves ill-prepared when they realise that the total amount they are actually taking home differs substantially from the amount they assumed they would be getting, he said.
He attributes this to a lack of knowledge about their remuneration structures, regardless of the education or skills level of the new employee.
“While tertiary education institutions may prepare you for your profession, they do not impart much practical advice and information about remuneration structures.
“One of the biggest concepts that still catches new starters by surprise is the difference between their cost to company (CTC) and net salary.”
CTC is the total remuneration that an organisation pays an employee, of which the salary is just one component.
“The elements included in the CTC may vary from business to business and they could include voluntary deductions such as contributions to a pension, provident fund or retirement annuity, group insurance and medical aid,” said Lindeque.
“CTC will include statutory elements such as Pay-as-you-Earn (PAYE) taxation and Standard-Income-Tax-on-Employees (SITE), leave and bonus allocations.
“These components and the extent of the company’s contributions can vary significantly between organisations and may not always be explained upfront. It is therefore advisable for employees to familiarise themselves with these items and get clarity on what their employer is offering, to avoid unexpected disappointment at the end of the first month,” Lindeque said.
In addition to this, new employees need to be aware of those items that are a feature of all payslips and which will determine their net salary, he said.
“Employees who are new to the workforce seldom appreciate that they will be taxed on their remuneration, regardless of how little they believe they earn.
“Companies are responsible for deducting Pay-as-you-Earn (PAYE) tax and for making contributions to the Unemployment Insurance Fund (UIF) on behalf of their employees,” said Lindeque.
“Alongside medical aid and retirement fund contributions, these items can make a significant difference to the money employees can expect to register in their bank accounts at the end of each month.”
Speak to HR
To better understand and structure their earnings optimally from the start, Lindeque advises that new employees study their organisation’s Human Resources (HR) policies and spend as much time as necessary with their HR delegates to ensure that they ask all the relevant questions regarding their understanding of these elements.
“It is crucial that new starters know what to expect on their salary slips or remuneration contracts and that they engage with HR representatives who should be able to clarify or explain those elements which they are uncertain about. If HR do not know the answers, they will be able to direct employees to the experts responsible for the company’s benefits.””
Once employees have clarity on what the company offers, they will have a better idea of what choices they have in structuring their payslip. This includes exercising their option on which retirement savings investment strategy they are pooled in, and the level of their retirement fund contributions, he said.
“Many employees – whether new or not – are either not aware of, or do not pay attention to, the fact that they have a choice over which retirement investment strategy they are pooled in. Without exercising their choice, new employees might be included in a default moderate strategy, when they should actually be in an aggressive investment strategy while they are young and accumulating assets,” said Lindeque.
Lindeque also points to the default retirement contribution level that new employees can opt into if they do not exercise a contribution level choice.
“Some companies give employees a choice over how much of their salary they would like to contribute to a retirement fund. Maximising your tax-deductible retirement contribution is one of the best ways – especially for young employees – to save in a tax-efficient manner and create healthy financial habits from an early age.”
Lindeque said that it was also important for new employees to understand whether they are paid a different salary while they are on probation – often the first three months of starting a new job – than when they are permanently appointed.
“While employees are on probation, they may not be part of the company’s risk and retirement fund, so these contributions are not deducted.
“It is advisable to obtain a mock salary slip of what your ‘permanent’ remuneration would look like from the HR department – however presumptuous this may appear – to avoid having to make a significant lifestyle adjustment after your probation period,”he said.