Salary packaging made tempting

by 20 Mar 2007

Salary packaging can be a very complex field for both business and HR professionals. Teresa Russell reports on the latest trends and talks to organisations at different ends of the salary packaging spectrum

In this tight labour market, the war for talent has made organisations try to hold tight to the people they’ve already got. Although most employers will tell you that a salary/remuneration packaging offer does not attract or retain staff in and of itself, they will concede that they’d rather have a good range of services to offer employees than nothing at all.

An attractive remuneration package is always part of the mix in any modern organisation’s attraction and retention strategy.

Salary packaging trends

In 2006, Mercer Human Resource Consulting conducted a survey on the remuneration packaging practices of around 150 Australian organisations. It found that around 70 per cent of them use a remuneration package approach. This figure has remained stable over the last four years. It is still more commonly used for senior executives than any other staff category.

Among the staggering range of benefits that may be provided to employees, some are included in the calculation of the remuneration package (that is, the employee sacrifices salary to receive the benefit), while others are additional to the package.

Allowing employees the flexibility to vary their remuneration package has decreased across all staff categories by nearly 10 per cent since 2005. The survey reports that at the median, a minimum 60 per cent of an employee’s package must be taken as cash.

Mercer also found that 35 per cent of organisations pay the FBT liability – up from 30 per cent over the previous year. Most said they did this as a means of maintaining package value and because the costs were minimal.

Introducing salary packaging

Although salary packaging is standard in many organisations and industries, there is still a significant proportion of the population that has no exposure to the practice. Queensland Rail is a State Government owned corporation that employs 13,500 people, with a diverse range of roles spanning railway workers to design engineers, and everything in between.

Most of the organisation is paid under award conditions, with a small number of managers on individual contracts. Peter Shaw’s role as manager of remuneration has evolved from administering executive contracts to now including salary packaging and remuneration management for the whole workforce.

“We are relatively recent entrants into salary packaging, starting with superannuation five to six years ago,” says Shaw. Then three years ago they introduced novated leases on motor vehicles and the purchase of laptop computers into the salary packaging offer.

A large proportion of staff use the salary sacrifice super contributions, while 600 to 700 have taken up novated leases. Another 600 to 700 people have purchased laptops as well.

“We have a general philosophy that we will only include items that are either taxed at a concessional rate or not taxed at all. Anything that attracts FBT is at a higher tax rate, so there isn’t a great amount of interest from staff. We won’t introduce anything that will have a low take up rate or be of little interest,” explains Shaw.

Phil Taylor, head of HR at The GPT Group, started his organisation’s salary packaging offer from a unique position. GPT owns and manages large property assets (such as shopping centres) in Australia, the USA and Europe. The company was established in 1971 when Lend Lease externally managed it. However, in June 2005 it became an independent company with an internalised management model.

Taylor, who at that stage was the sole HR practitioner in the company, had to build a whole new HR platform from scratch. This included payroll, superannuation funds and salary packaging. Part of the agreement with the 180 people who joined GPT from Lend Lease was that their salary packaging options were to be at least as good as what they already had.

“Lend Lease had managed all their salary packaging in-house, but because I was a team of one at the time, it was obvious I would outsource this service,”says Taylor.

Choosing a provider

Taylor headed a project team of eight managers and employees to choose a supplier. “We chose a provider that had a strong technology platform, whose offer was well structured and well thought out, and whose approach was compatible with what we were looking for. They were also very innovative about the types of salary packaging available,” explains Taylor.

GPT prides itself on its egalitarian culture, so the wide range of salary packaging products was made available to all employees in the company. The provider charges a flat fee for each benefit people access (up to three benefits). Anything after that is free. “I did the numbers. If every single employee we had at the time packaged everything they could have, I’d have had to employ at least one full-time person to manage the administration. The outsourcing option was more cost effective,” says Taylor.

A lot of GPT’s benefits are cash flow positive, which means employees can salary sacrifice, rather than spend now and claim it back on their tax at the end of each financial year. The most popular of the wide range of benefits offered are superannuation, novated car leases and lunches. All 200 staff at the company’s head office in Sydney’s CBD can order their lunch online each morning and have it delivered to the office by 12.30pm each day.

Queensland Rail chose its supplier after going through a typical government tender process. “We needed our administration process to align with any provider we chose. All the tenderers differed in the way they calculated, reported and paid GST and FBT,” says Shaw, who chose the provider from a shortlist after reference checking. “Service delivery is not just about the price of a car. Sustainability of service delivery over time is vital,” he says.

Attraction and retention

Both Queensland Rail and GPT believe their offers in salary packaging form just a part of their employee retention strategy. “Salary packaging is a part of the normal framework for employment these days,” says Shaw.

“Retention is the outcome of doing a lot of things right. When every option in the market is open to employees, we know they are not going to move for better packaging options. You just remove it from the equation,” says Taylor.

The latest staff survey at GPT shows extremely high employee engagement scores. “We’ve doubled our workforce in the last 18 months and despite this, you can still feel very strong values and enthusiasm [in the company],” explains Taylor.

Communication

The main challenge Shaw has faced at Queensland Rail has been ensuring clear communication with employees, educating them about their salary packaging options. “One of the common misconceptions occurs because people know that their neighbour can salary sacrifice their mortgage. They don’t understand that there are different benefits available to those working for PBIs (Public Benevolent Institutions),” says Shaw.

Internal newsletters, provider education sessions and on-line provider information are all used to clarify and promote the options available.

Tips

“I’d recommend others to consider outsourcing in terms of cost effectiveness, efficiency and the range of options available and see if it works for them,” says Taylor.

Shaw says it is important to ensure any third-party provider has a great reputation for service delivery that can be sustained over time. “Several employees might have a three- to five-year relationship with the provider, so you have to make sure that it works well. Manage the provider through regular meetings and dialogue with them,” he advises

Opening up remuneration packages

Remuneration packages can include any or all of the following:

• Base salary

• Annual leave loading

• Other cash allowances and payments

• Employer superannuation contributions

• Employee superannuation salary sacrifice

• Benefit value of motor vehicles

• Value of other fringe benefits such as telephone

expenses or health insurance

• The cost of fringe benefits tax (FBT)

They exclude on-costs such as workers’ compensation premiums or payroll tax

Source: Mercer Human Resource Consulting