Is a 14th Month Salary a Viable Proposition?

Electoral promises

While the government might resort to deficit financing to cover additional payroll costs in the public sector, there is no economic rationale for imposing additional labour costs on private sector enterprises…

By Prakash Neerohoo

In the run up to the next legislative elections, likely to be held between August and December 2024, many electoral promises have been made by both the parliamentary Opposition alliance (Labour-MMM-New Democrats) and the government. The 2024-25 budget contained a wide array of freebies (social benefits and allowances) and fiscal concessions to different segments of the population. It seems that this pre-electoral exercise of competitive welfarism is not over yet. We are likely to see more promises, some being more reckless fiscally, in the coming months as political parties scramble to secure the votes of the electorate.

One such promise catching public attention is the proposition to grant a 14th month salary to employees in the public and private sectors. The first person to float this idea was the leader of the PMSD who raised it in a question in Parliament while he was leader of the Opposition. Apparently, the promise of a 14-month salary would be one of the ideas to be coopted by a future alliance between the PMSD and the ruling party to give it an extra mileage over the Opposition. Since the government’s goodwill with old-age pensioners is being impaired by rampant inflation that is eroding their purchasing power, the temptation to appeal to active workers in general is irresistible.

If that promise makes its way into the political manifesto of an MSM-PMSD alliance, it could be a game-changer in the election if the electorate falls victim to such political baiting. But economically it would a hard sell to private sector employers. There is already a 13-month salary (end-of-year bonus) that is a permanent and irrevocable feature of employee compensation, mandated by law (under section 54 of the Worker’s Rights Act). Probably Mauritius is the only country that provides a 13-month salary as a vested employee’s right.

In 35 years of practising accounting and taxation in a developed country, I have not come across any public or private entity paying a 13-month salary to their employees as an acquired right, irrespective of performance or productivity. If employers are required to pay a 14-month salary, that would have serious economic implications for the country. As far as I recall, some companies in the sugar industry paid a 14-month salary in one year in the 1970s when high export sugar prices brought in substantial windfall gains. That was a one-time payment that was never repeated subsequently.

Public sector

What would be the impact of a 14-month salary on payroll in the public sector, which comprises central government, local government, para-statal bodies and State-owned enterprises? The central government has already a huge budget deficit of Rs 63 billion for 2024-25 (6% of GDP) which will be financed by more borrowings internally and externally. Public debt has already reached Rs 575 billion, or more than 80% of Gross Domestic Product (GDP). Para-statal bodies and State-owned enterprises are not faring well financially, as most of them are running deficits. The central government’s total employee compensation is estimated at Rs 42 billion for 2024-25 (for 13 months). One additional month of pay (14th)on public payroll would costRs 3.2 billion. Such a generous move without productivity gains would certainly be a huge drag on public finances for years to come.

When we see long queues of patients at public hospitals or long lineups of clients waiting for hours to be served at government offices delivering services to the public, can we prevent any reasonable person from thinking that a 14-month salary would be a reward for the status quo instead of bringing some much-needed efficiency. Just take the example of the National Transport Licensing  Authority (NTLA), whose offices see daily long lineups of clients waiting for the processing of their requests for vehicle registration or transfer of ownership. Hopefully the project to implement digitalization of NTLA services, announced in the budget, will cut down the processing delays to a reasonable timeframe.

Private sector

In the private sector, the impact of a 14-month salary on employers would vary from industry to industry. Big corporations doing well could probably absorb the additional payroll cost, which would reduce before-tax profits subject to corporate tax (15% in general) while lowering after-tax profits available to pay dividends to shareholders. However, Small and Medium Enterprises (SMEs) would be hit with an additional payroll cost coming in the heels of an increase in minimum wage (from Rs 16,000 to Rs 18,000 in 2025). These enterprises would have three options: (a) reduce staff to keep payroll at a sustainable level, (b) fall back upon government wage assistance schemes, and (c) request income support for employees. One income support scheme being used now is the “CSG Income Allowance” payable to employees drawing less than Rs 50,000 per month.

The “Contribution Sociale Généralisée” (CSG) is a payroll tax paid by employers (6%) and employees (3%) in the private sector to raise funds for the payment of retirement benefits. It is credited to the Consolidated Revenue Fund (CRF) instead of a pension account.

From 2020-21 to 2023-24, the government has exhausted the CSG fund to pay retirement benefits to retirees, income support allowances to workers whose employer-paid salary was less than certain income thresholds (see table: ‘Social allowances paid from CSG in 2024- 25’) and other social allowances.

The income support allowance will continue to be provided in 2024-25 to workers whose wages are less than the minimum guaranteed income of Rs 20,000 per month (effective July 1, 2024) and to employees drawing less than Rs 50,000 per month. For 2024-25, at least Rs 9.8 billion will be drawn from the CGG fund to provide income support and a child allowance.

As we have stated in previous articles, the CSG was originally meant to raise funds for paying retirement benefits (work pension) to private sector employees, but government has deposited all CSG contributions collected in its CRF to pay for all kinds of social benefits and allowances that otherwise would fall under the budget of the Ministry of Social Security.

The IMF has asked government to restrict CSG payouts to retirement pension for private sector workers. If it were to take more money from CSG funds to finance a 14-month salary in the private sector, government would be using funds raised from private sector employees to pay them a 14-month salary. It’s like taking money from the right pocket only to put it back into the left pocket. But in the process no funds would be saved to pay future retirement benefits to private sector employees.

Ideally CSG funds should be kept in a separate account and invested at reasonable rates of return to fund pension obligations in the future. One wonders how government would meet retirement pension liabilities for CSG contributors if the CSG fund is already running out of money due to misappropriation of funds for the payment of social allowances.

Without support from CSG funds, SMEs would have to either lay off staff or raise their product or service prices to consumers, which would impair their competitiveness, especially in export markets. Having a new element of fixed cost (14-month pay) in payroll cost as part of total operating costs (labour, materials and overheads) is not a prospect that any enterprise is ready to face in these times of economic uncertainty.

Flawed concept

Beyond the practical funding implications, the concept of a 14-month salary is basically flawed. Any addition to payroll cost is usually linked to cost-of-living compensation (for inflation-indexed wages), to upward movement in a salary scale by employees getting more money after years of service or to the hiring of additional staff warranted by an output increase. A 14-month salary imposed as a fixed annual cost would not be justified without productivity gains. There are alternatives to this kind of universal compensation methodology.

Under modern Human Resources management practices, productivity gains are typically compensated through performance bonus payments to employees and/or profit-sharing schemes. In some countries, public and private employers pay a performance bonus (3 to 5% in general) to employees who meet or exceed expectations at work. This payout requires an annual performance appraisal that sets specific goals against which actual performance is measured. For example, a tax revenue agency may pay a performance bonus to auditors who achieve a high audit recovery of unreported or unpaid taxes from taxpayers (both individual and corporate).

In a private company, a CEO may be rewarded with a bonus based on year-end corporate profits or with stock options (to buy company shares at an issuance price). At a more basic level, a sales representative may get a basic pay plus a bonus for bringing in new clients or increasing sales to existing clients.

Profit sharing

A profit-sharing scheme is another way to compensate employees for their hard work and contribution to the enterprise’s output and sales. When a company makes profits, it may allocate a percentage of before-tax profits to be paid out to employees in recognition of their contribution to the company’s bottom line. In most countries, company contributions to a profit-sharing scheme are tax deductible for corporate tax purposes. Payouts to employees are usually taxable at marginal tax rates but employees are still better off with an after-tax benefit (75% of gross amount with an average tax rate of 25%).

Instead of contemplating a 14-month salary, government should introduce a performance bonus system in the public sector based on performance that is evaluated by objective criteria and not subjective management preferences. That would be an incentive for employees to work hard and deliver efficient public services. As far as the private sector is concerned, government should encourage companies to establish profit-sharing schemes to attract and retain talent, especially at a time when increasing emigration of young talent is causing a brain drain for the country.

Government has exhausted its imagination to use social policy to distribute freebies to specific segments of society, but its generosity still does not amount to redistribution of wealth within the confines of fiscal policy. A genuine Welfare State requires equal access to quality public services (heath, education, training, employment, housing, etc.) and equitable access to social benefits (positive discrimination in favour of the poor). Paying a 14-month salary would constitute social engineering of employee compensation, lacking economic justification. While the government might resort to deficit financing to cover additional payroll costs in the public sector, there is no economic rationale for imposing additional labour costs on private sector enterprises unrelated to profitability, productivity, or cost-of-living compensation.

Mauritius Times ePaper Friday 28 June 2024