(First of two parts)
Even pre-pandemic, the challenge of attracting and retaining the right talent, especially key members of the management team, are top of mind at every organization. The “Great Resignation” that set in during the peak of the COVID-19 pandemic told the story of the unprecedent spike in talent movement. These disruptions remain a major concern for employers to this day. The 2023 PwC Global Workforce Hopes and Fears Survey, which gauged the attitudes and behaviors of over 54,000 workers in 46 countries and territories, found that the challenge of retaining the best people continues, with inflation being the topmost consideration for employees looking for better-paying jobs.
As a result, organizations must employ creative strategies in recruiting and retaining the best talent if they want to thrive. These include offering competitive compensation and benefits packages, including attractive retirement benefits, equity-based compensation, allowances, other benefits in kind, incentives and bonuses. When weighing the cost and benefit considerations, employers must ensure that they are fully compliant with relevant tax laws and regulations.
In this two-part article, let us take a closer look at some of the more effective compensation-linked workforce retention strategies and why these are gaining traction in the talent marketplace.
One of the most popular compensation-linked retention strategies is performance-based pay. This includes salary increases based on the individual performance of the employee and the overall performance of the organization. Examples would be profit-sharing or performance-linked incentives on top of mandatory 13th month pay for rank-and-file employees.
Under Section 32(B) of the National Internal Revenue Code (NIRC), as amended by Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law, 13th month pay and other benefits are exempt from income tax and withholding tax on compensation up to a maximum of P90,000. Other benefits under the tax regulations include productivity incentive bonuses, Christmas bonuses, loyalty awards, gifts in cash or in kind and other benefits of a similar nature.
DE MINIMIS BENEFITS
Providing de minimis benefits to employees regardless of their job position is also a common strategy to retain talent. By definition, these are facilities or privileges furnished or offered by an employer to the employees that are relatively of small value merely as means of promoting health, goodwill, contentment, and efficiency. These benefits, which are minor perks and rewards with set thresholds on value, are tax-exempt and therefore excluded from the employee’s taxable income.
The following are considered as de minimis benefits based on Revenue Regulations No. 11-2018, the implementing regulations of the TRAIN Law, which became effective on January 1, 2018:
1. Monetized unused vacation leave credits of private employees not exceeding 10 days during the year.
2. Monetized value of vacation and sick leave credits paid to government officials and employees.
3. Medical cash allowance to dependents of employees, not exceeding P1,500 per employee per semester, or P250 per month.
4. Rice subsidy of P2,000 or one 50-kilogram sack of rice per month amounting to not more than P2,000.
5. Uniform and clothing allowance not exceeding P6,000 per annum.
6. Actual medical assistance, e.g., medical allowance to cover medical and health needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000 per annum.
7. Laundry allowance not exceeding P300 per month.
8. Employee achievement awards under an established written plan, e.g., for length of service or safety achievement, which must be in the form of tangible personal property other than cash or gift certificates, with an annual monetary value not exceeding P10,000.
9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per annum.
10. Daily meal allowances for overtime work and night/graveyard shifts not exceeding 25% of the basic minimum wage on a per region basis.
11. Benefits by virtue of a collective bargaining agreement (CBA) and productive incentive schemes, provided that the total monetary value received from both CBA and productivity schemes combined does not exceed P10,000 per employee per year.
The thresholds set under the rules should be taken into consideration to qualify for the tax exemption. Any excess amount over the ceilings will form part of other benefits which are tax-exempt up to P90,000. Anything in excess of the P90,000 limitation is subject to income tax and, therefore, subject to withholding tax on compensation in the case of a rank-and-file employees or fringe benefits tax (FBT) in the case of supervisors and managers.
Another strategy to attract and retain talent is equity-based compensation. As defined in the NIRC, gross income includes compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and other similar items. Thus, compensation may also be paid in money or in any form other than cash, such as shares of stock, bonds, or other forms of property. As such, equity income is also classified as taxable compensation income.
Common types of equity awards include Stock Options, Restricted Stock Units (RSU), Restricted Stock Awards (RSA), and Employee Stock Purchase Plans (ESPP). As a rule, the taxing point for share income occurs when there is no risk of forfeiture, i.e., when all the risk and rewards associated with the share income have been fully transferred to an employee. In 2022, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 13-2022 clarifying the income tax treatment of equity-based compensation.
In next week’s continuation of this article, we will elaborate further on equity-based compensation and other compensation-linked retention strategies being practiced in the market.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Marvin L. Madrigalejo is a director at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.