A new employee compensation paradigm – moving from Employee Compensation to Family Compensation
What is family based compensation?
Family based compensation is a new
compensation paradigm where an employer pays salary and benefits to the family,
specifically, employee and dependent
spouse, rather than the employee only. Read on to find out how this model will
work in an employee life cycle and what it means to the employer, employee and
their spouses.
It is a known fact
that money is one of the primary reasons for marital discords. In an era of
individuality and independence, both spouses must have near equal share and control of the family finances. This concept
is applicable in a single income family setup, where one of the spouses
(generally the husband) works and earns money whereas the other (generally the
wife) takes care of the household.
The sole idea behind
this compensation paradigm is to bring balance of financial control between the
spouses. The employee's remuneration is divided between the employee and the
spouse in a certain ratio e.g. 60 to 40% between the employee and the spouse.
Near equal spread of
financial control between the employee and the dependent spouse will reduce the
chances of acrimony due to finances, increase family satisfaction and in
general increase employee productivity. Any employee, supported by an empowered
and satisfied spouse, will be more effective than an employee struggling to
minimize the family conflicts.
Notice that the
employer is making no additional payments to the employee. For employees
managing income in a single-income family set-up, the overall family income is
not impacted. Overall family purchasing decisions are not impacted either. This
paradigm is only applicable to employees with financially dependent spouses.
Why is the family important?
Companies, today, are trying out various
mechanisms to bring work-life balance. Almost employer wants to seen as family
friendly. Kids and spouses are invited to the work areas and employees are
encouraged to spend quality family time whenever they can. The basic premise is
that an employee who spends more time with the family will be a satisfied and
more productive employee, supported by a
satisfied family. However, this is not enough and the most fundamental
aspect of family satisfaction, financial independence, is conveniently ignored.
The income earners, tend to have an “I am
the earner. I am the only one working hard in the family, while you guys are
having fun at my expense” attitude, ignoring the realities and hard-work
involved on the part of the spouse staying at home and taking care of the
household work. The home maker is, often times, frustrated if they don’t any
see nay appreciation or compensation for the work they are doing.
How long can employees appreciate the
importance of the family in the life of their employees yet fail to compensate
the family?
Family based
compensation, in short, involves the family in a single-income family setup, as
opposed to traditional compensation methods, where only the employee is
compensated.
Employee Life events:
How does the Family based compensation
paradigm work given all the possible life cycle events?
1. New Employment: When an employee first takes a job with a company and he is single,
the company pays him, per their policies. The employee income and family income
are exactly the same.
2. Marriage: When an employee gets married to an individual, who is financially
dependent on the employee, the company distributes the employee’s existing
income into 2 buckets in a pre-determined ratio. For example, 60% of the income
goes to the employee and 40% of the income goes to the spouse. The employee
must add the spouse as a “dependent employee” category. The family income is
unchanged, while the employee himself gets 60% of what they were making
originally. However, if the spouse is working and financially independent, then
no adjustments are made.
3. Spouse takes paid
employment after briefly taking care of household:
If the dependent spouse takes up paid employment and is no longer financially
dependent on the employee, it is up to the employee and the spouse to determine
if they want to continue with the distribution set-up or not.
4. Children: Having children may or may not impact the distribution %. Companies
may choose to follow a policy where they may want to increase the dependent
spouse’s share after birth of a child.
For example, after marriage the employee was paid 60% and the dependent spouse
40%. After the first child, the employee may get paid 50% and dependent spouse
50%. But, this could depend on the company policies.
5. Divorce: A divorce situation is a little tricky for the family based employee
compensation. Divorces have different settlement procedures. In accordance with
the settlement rules, if the employee pays a one-time amount and has no
obligation to support the separated former-spouse, then the employee starts
making 100% of the company compensation. However, if the settlement states that
the employee has a to keep supporting the former spouse, then the employer will
adjust the spouse’s share accordingly. Note that initiation of a divorce has no
change on the distribution set-up. The formal completion of divorce triggers the new distribution.
6. Re-marriages after Divorce: If an employee re-marries after divorce, the situation has to be
understood in the light of the original divorce. The distribution to the new
spouse can come only from the employee’s share. To illustrate, let us assume, a
male employee makes $10,000/- per month, of which he gets $6,000/- (60%) and
his wife gets $4,000/- (40%). The employee and his wife get separated and based
on the settlement rules, the former wife now keeps getting 40%. The employee
continues to draw the $6000/-
If the employee
decides to re-marry, then the new wife will be paid 40% of the employee’s
share. In other words, the employee gets $3600/- (60% of $6000/-) and the new
wife gets $2400/- (40% of $6000/-). The ex-wife continues getting $4000/-,
assuming she is still financially dependent.
7. Death of Dependent Spouse:
In the event of death of the dependent spouse, the
employee starts getting 100% of the income.
8. Re-marriage after death of
dependent spouse: As pointed out earlier, after
death of the dependent spouse, the employee starts getting 100%. If the
employee re-marries, the original distribution is now established with the new
wife.
9. Death of Employee: If the employee dies, naturally, all compensation benefits would
cease to exist.
10. Termination or Retirement
of Employee: In the event of termination or
retirement of the employee, all compensation or benefits cease to exist. Any
termination of retirement one-time payments are paid to the employee and
dependent spouse in the distribution ratio established earlier.
Transitioning from existing employee based compensation to family based compensation
In order to truly become a family
friendly, relationship based organization, companies would have to make an
effort to move to the family based compensation paradigm. As you may have
realized, the transition is more on policies rather than forcing the companies
to invest more money. Companies may have to be make an initial investment on
their payroll processes to add the dependent spouse as a dependent employee and
to establish the distribution in the payroll system.
