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There’s a big squeeze going on for employees around the world right now. The headlines are full of mass layoffs in the jobs market and cost of living concerns in the general economy.
For payroll and HR professionals, it’s a tough time too. Many won’t have experienced the recession of 2008, and while this one feels very different, it will force the same type of tough decisions their peers made 15 years ago.
There are ways to make the results of those tough decisions less likely to be layoffs, and that is by knowing your toolkit of options and deploying them effectively within your organisation. Today, we’ll look at:
- Cost-neutral payroll compensation tactics
- Alternative payroll compensation tactics with cost implications
- Choosing the best way to pay payroll
Efficient compensation tactics when payroll budgets are tight
There is a menu of items for any organization to choose from to make their payroll process more tax-efficient and budget-conscious while still rewarding employees appropriately.
While options can differ substantially depending on the country payroll is delivered, many countries will have the same general themes for you to investigate. We can further break down these benefits into ones that are cost-neutral to the business, and those with cost implications.
Cost-neutral payroll compensation tactics
1. Deferred compensation options
Deferred compensation doesn’t necessarily mean ‘we promise to pay you later.’ Instead, it can mean that you defer compensation into a pension pot, for example, or stock options that can be claimed later. This can allow employees to tighten their belts now in return for a greater pension return in the future, although typically, this option is used for high-salaried employees.
With deferred compensation options, there is always the existential threat for the employee that the business will go bankrupt, and they lose all their money.
2. Tax credits and incentives
Utilising tax credits and incentives on the business side is highly dependent on your local jurisdiction and, simply put, requires a good deal of knowledge of the tax code. However, if you can get a handle on them, tax credits can be a valuable tool for reducing payroll costs.
In the US, for example, the Work Opportunity Tax Credit (WOTC) is a federal tax credit that reduces the amount of taxes an employer owes for hiring certain target groups, such as veterans, people with disabilities, and people receiving public assistance.
3. Condensed working week and flexible working arrangements
The work-life balance can be more important to some people than wages, so offering fewer working days for less pay as a potential option for employees can reduce your payroll burden significantly.
Of course, in this instance, there is a productivity trade-off, even when considering positive reports about productivity levels after reducing the work week (and note, most of those reports are based on keeping salary at the same level). If it’s implemented for some employees and not others, there is also the potential for workload being piled onto those left behind.
4. Additional holidays
Adjacent to flexible or reduced working hours are additional holidays. This may work particularly well in a business with regular peaks and troughs in activity. The way you pay your workers (either a reduced monthly salary throughout the year or simply gaps in salary if extended leave is granted) will be determined by cash flow requirements and the employees’ needs.
5. Extra social activities
While ‘work social activities’ aren’t usually at the top of an employee’s compensation want-list, providing extra staff nights out and social activities in lieu of higher compensation can work in some industries, particularly for those with a labour force comprising of young people.
Staff entertainment can also be tax deductible in certain circumstances.
6. Vouchers / Food Stamps
Vouchers, such as those used in multiple high-street stores and supermarkets, or food vouchers, can be another way to compensate employees tax-efficiently.
While they generally can’t be used multiple times within a defined time period, employment laws will often allow for one-off gifts and bonuses (or up to a certain limit) to be given in the form of vouchers that can be tax efficient to the business.
Alternative payroll compensation tactics with cost implications
While compensation tactics like the following won’t necessarily save money off the business’s bottom line, they can provide invaluable support for employees during tough times.
In some circumstances, there is the potential to utilize economies of scale. By buying the benefit in bulk, the employer can help the employee at a lower cost than the employee could themselves. The trade-off in the employee’s mind is then seen as advantageous when considering an overall compensation package.
1. Providing childcare
Childcare is always a significant cost burden for employees. In general, there are no tax benefits or expense write-offs for businesses paying for childcare, so it’s a straight swap for salary in terms of bottom-line costs.
However, beyond the money spent on childcare, there is plenty of evidence to show that a lack of childcare can result in difficulties attracting and retaining employees, lost days in productivity, and even lead to a lack of diversity in the workforce, so providing childcare can result in fewer costs for the business down the road – even if those costs are hard to put an exact number on.
2. Medical and dental benefits
Providing medical coverage and/or insurance, as well as benefits such as dental care, can give employees real peace of mind and help improve productivity and retention.
There are also innovative ways for employers to provide these benefits while also reducing payroll taxes. As always, this entirely depends on local laws.
In the US, for example, Flexible spending accounts (FSAs) on the employer side and Health savings accounts (HSAs) on the employee side are worth looking into. In essence, they allow money to be put into accounts without paying tax first, and then used for eligible medical and dependent care expenses, such as doctor’s appointments, prescription drugs, and childcare costs.
3. Favorable loans
In some sectors and jurisdictions, it is permissible to give favorable loan terms to employees, allowing them to benefit from a lower interest rate or without a need to put up collateral. These can be given to help an employee during a medical emergency, housing issues, or simply to retain that employee for the long-term.
The reason for the loan is not important, but the structure of that loan and how you report it to the tax authorities are. This whole area can be fraught with complications but, when done correctly, can help employees going through hard times.
4. Pension Contributions
While pension contributions have a cost to the business, they provide an excellent way for employees to get favorable tax terms in the long run. Generally, taxes on pensions are much lower than on wages.
Upping the percentage your business contributes to an employee’s pension pot can make real differences in attracting and retaining employees while giving them long-term financial security.
5. Employee Training
Although a cost to the business, training is a great way to provide benefits for employees. What’s more, training will often benefit the business too in terms of improved employee productivity, innovation, and morale.
Training can also sometimes be used to reduce the tax burden of a business as well.
In the EU, training costs are typically treated as operational costs (and therefore can be used to reduce taxes on profits), so offering additional training to employees instead of wages can reduce the overall tax burden on the business.
6. Relocation assistance
In some cities, rental costs can run to 50% of an employee’s salary or more. In other cities, that can be significantly lower.
As an example, many young people will want to save for their first home but be unable to because of high rental costs. Allowing them to move to another destination to take advantage of better cost-of-living expenses can help them achieve that goal.
Giving workers the chance to relocate to another country can be both a cost and a cost saving to the business, depending on how the deal is structured i.e. salary could be reduced, but their take-home pay is effectively larger due to having less expenses.
7. Free meals and accommodation
Every compensation you give an employee will be judged, tax-wise, by its ‘fair market value’. There are some exceptions to this, such as free meals that are distributed on the business premises.
When it comes to accommodation, and again this is all subject to the jurisdiction, there is the ability to get tax benefits from paying for an employee’s accommodation.
It should be said, though, these are rare and usually depend on if an employee can only perform the job if staying on your property. This leads to examples like nurses, prison guards, etc., which does not apply to most businesses.
8. Travel benefits
The English language is full of words never used, and ‘dromomania’ or ‘the love of travel’, is one you’d rarely hear in normal conversation. The impulse, however, is common throughout the world.
Offering people the chance to travel as part of their job can be seen as a huge benefit and a key reason to stay in a role. While some of us prefer our own beds over a hotel room, traveling can be a key part of the compensation toolkit.
Choosing the most cost efficient way to pay payroll
When looking for efficiencies in delivering payroll, how you pay is a crucial aspect to consider, and one often overlooked. The benefits can be significant if you can save even 1 or 2% of your payroll costs and reduce the amount of administration time for processing payroll.
1. Reduce FX costs and bank fees
Many payroll partners, such as TransferMate, use their own global payments infrastructure and technology to allow their clients to make payments around the world more cost-effectively than traditional banking networks.
Simply put, with fewer third parties handling your payroll, the less banking and FX fees you have to pay.
2. Reduced errors and manual work
The technology backing this payments infrastructure also means payroll payments are faster, are less prone to error, and have less need for manual processing.
As you are not using the traditional correspondent banking system, which is a complex web, payments move faster through the network. You also don’t have to upload different files to different systems and manually match the payments, resulting in less error and administration work.
3. Reduce processing time for each payroll instance
Other technologies can also help reduce the time it takes to process payroll each month. For example, Global Accounts by TransferMate allows users to pre-fund payroll in a network of local accounts, meaning the funds arrive quickly in employee bank accounts.
This can save 2-3 days each month in the payroll timeline.
Your payroll toolkit is large, but tough decisions are inevitable
There are many options for payroll and HR professionals and their leadership teams to consider when trying to reduce their payroll burden during tough economic periods. This doesn’t make deciding which to deploy, and then actually making them a reality, any easier.
The human factor should always be put first in any of these decisions. Look after your employees, and they will look after you.
We’re all being squeezed from several directions right now, but we shouldn’t forget there are ways to relieve some of the pressure.
To make your payroll process more efficient, saving you time and money, contact the TransferMate payroll team now.
