“You are oblivious to my needs.” We often hear this from our partners, family and friends. Failure to acknowledge and respect each other’s specific needs is a cause for any relationship to fall apart. An employer-employee relationship is no exception. Employees have different needs and employers must recognize and face this reality. But the question is, “What is the cost of satisfying Juan’s needs?”
While there is more to employee engagement and satisfaction than pay and rewards, these play a critical role in a company’s Employee Value Proposition to attract and retain the right talent whose competencies would match the demands of the business. Like any transaction, providing employee benefits such as the more common ones mentioned below, has cost and accounting implications.
An icing on the cake
For fields where demand is high and for positions that are hard to fill, it is common to give signing bonuses to attract key talents. In certain cases, these are given to match a potential hire’s pay expectation but without distorting the existing basic pay structure. Giving signing bonuses, however, is a sensitive matter because it may have an impact on the morale of existing employees, and may also set the tone on how an organization would want to compete in the job market. It should be treated with utmost diligence to maintain confidentiality.
Signing bonuses are usually given as a single payment upon onboarding of the new hire and are given with or without clawback if the employee leaves during the term of the contract. This one-time signing bonus is expensed when incurred, unless there is an enforceable non-compete clause in the contract, enabling the company to recover the sign-on payment in the event the employee leaves, and depriving competitors of the chance to use the services of this employee. In such cases, an asset may be recognized, which shall then be amortized over the minimum period of employment.
I need some ‘me’ time
Work-life balance must be one of the most overused phrases in people management and we have learned a lot of views on what the concept means. It alludes to a need for balance, which can be a matter of choice. Even the word “life” can mean so many things. What is critical is for employers to know and respect how employees define “life” and that balance.
The Labor Code of the Philippines (Art. 95) requires the yearly provision of a five-day service incentive leave with pay but companies adopted leave programs that are far more generous to address their employees’ need for some “me” time.
While accounting for compensated absences is generally straightforward, errors are often committed when accruing for these. One just needs to distinguish accumulating absences that may be carried forward and used in the future, from non-accumulating absences that lapse if not used in full within a prescribed period. A classic example of accumulating absence is vacation leave. Sick leave is often non-accumulating. Accumulating absences are typically earned as employees provide services, whereas non-accumulating absences are not related to services. Accumulating compensated absences are recognized as expense when service that increases entitlement is rendered, while for non-accumulating compensated absences, expense is recognized when the absences occur.
In addition to compensated leaves, certain companies have introduced alternative work arrangements such as flexi time, part-time, telecommuting and reduced workweek, which would not necessarily result in a significant increase in employee costs.
I nailed it! What’s in it for me?
Employees want to be recognized for their contribution and high performers want to be differentiated from the rest. To reward employees, many organizations continue to embrace the pay-for-performance concept, where one is rewarded more if he performs better than the others, despite the increasing clamor for a much simpler performance management and rewards systems.
An example of a common variable reward is the performance-based bonus, which is often payable some time after the yearend. A common accounting issue is the recognition and the measurement of the obligation. Similar to other liabilities, a bonus obligation is recognized when the company has a present legal or constructive obligation to make payment as a result of past events, and a reliable estimate can be made of the amount payable. So if a company has a practice of paying an annual performance bonus, which then creates the constructive obligation, and that past practice would give a clear evidence of the amount of the obligation, even if the amount is not yet determined at yearend or there is no set formula for determining the amount, a liability can already be recognized.
In determining the amount, the company should also consider the expected number of leavers.
Allow me to choose
Employees expect a greater degree of flexibility in their benefits and they want to have a say in it. Certain companies have introduced the use of a menu from which employees could select the benefits that would best suit their needs, as long as the total cost falls within the prescribed limits. Other than leaves, most common in the menu are benefits in kind, which are usually given in the form of housing, transportation, tuition reimbursement, medical insurance, dental, gym memberships or, other subsidized goods or services.
The cost of providing these benefits should be measured at the cost to the employer of providing the benefit. For example, in the case of a leased car, the benefit would be the amount of lease charges during the year and for medical benefits, the amount of premiums paid during the year.
Hang in there. Retirement is only 30 years away.
I read this statement in one card and I found it to be rather amusing, yet so true because it tells us that while still many years away, retirement is something that an employee can look forward to. This is the reason why employees have shown considerable interest in their employers’ retirement programs. They need financial security, as well as the assurance that they will be able to sustain a comfortable lifestyle when they retire.
In the Philippines, we have Republic Act (R.A.) No. 7641, otherwise known as the Retirement Pay Law, which provides that an employee of an establishment, upon reaching the age of 60 years or more but not beyond 65, and who has served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service.
R.A. 7641 does not require the establishment of a formal retirement plan but prescribes only the compulsory payment of the minimum retirement benefit when it becomes due. A company can decide to give more than the minimum requirement. Also, even if not required, smaller and relatively young companies that are employing not more than ten (10) employees can still sponsor plans to start early and spread costs over a longer period of time.
Employer-sponsored plans are classified as either defined contribution plan or a defined benefit plan. A defined contribution plan is where an entity pays fixed contribution into a separate fund and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits. The level of benefits depends on the value of the contributions paid and the investment performance achieved on those contributions. Therefore, the employer’s liability is limited to the contributions it has agreed to pay. Employee bears both the actuarial risk (that benefits will be less than expected) and the investment risk (that assets invested will be insufficient to meet expected benefits).
A defined benefit plan is a plan that specifies the benefits to be paid and is financed or funded accordingly. Normally, benefits are defined in relation to an employee’s salary. In a defined benefit plan, the actuarial risk and investment risks are borne by the employer.
Accounting for defined contribution plans is straightforward, as the amount recognized as expense is the contribution payable. Accounting for defined benefit plans is more challenging because actuarial assumptions and valuation methods are required to measure the balance sheet obligation and the income statement expense. The expense recognized does not necessarily equal the contributions made in the period.
In the Philippines, most companies with formal retirement plans adopted defined benefit plans, perhaps because of the allowed flexibility in funding. A company providing benefits under R.A. 7641 is also effectively adopting a defined benefit plan. Hybrid plans are also becoming more popular.
Accounting for retirement is complex and related liabilities, which are long term in nature, are difficult to measure and are often material. It is imperative for a company to consult with experts on the kind of plan that it can afford and that would best suit its needs.
Different strokes for different folks
Different people have different needs. There is no hard and fast rule on what benefits to give and how an organization should design its benefit program. There is no one-size-fits-all model. Each organization has its own unique culture. Each “Juan” has an opinion on what benefits would bring most value to him. We all want to have happy and satisfied employees and would not want to someday refer to any of our key talents as the “Juan that got away.” However, any relationship is a two-way street. We must always be cognizant of the needs of the business. In designing a benefit program, we need to ensure that it is strategically aligned with the organization’s overall business objectives and deliberately created to drive the organization’s people agenda.
Its true worth
It is clear that providing benefits to employees means additional costs to the company.
That is what accounting tells us. That is what we see in the books—Employee Benefit Obligations. The challenge for us now is to look past the numbers and recognize the true worth of each centavo that we spend. Because what is the peso value of the increase in human skill and potential? What about increased self-worth among employees when we recognize their invaluable contribution? How will we value how far an employer has motivated and developed its people to become significant contributors in building a stronger nation? In my mind, when we meaningfully spend on our people and respond to their needs, we are making an investment that is clearly beyond measure.
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Emy De Guzman-Castro is a Partner from Assurance and Human Capital Lead of Isla Lipana & Co./PwC Philippines. Email your comments and questions to firstname.lastname@example.org. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.