How to Optimize Salary Increases with Employment Pension Plans
Learn how Employment Pension Plans help companies optimize salary increases, enabling higher net compensation for employees while reducing costs for the company thanks to tax deductions and social security contribution reductions.
Most companies look for efficient ways to increase employee compensation without significantly raising their total costs. This is one of the reasons why flexible compensation (restaurants, childcare, gym, health insurance...) has been so well received in recent years. However, one of the best instruments for optimizing a salary increase is still not as well known: the Employment Pension Plan. With an Employment Pension Plan, employees not only receive higher compensation thanks to their company, but it also generates significant savings for the company through tax deductions.
In this article, we explain how you can leverage Employment Pension Plans to optimize your next salary increase, benefiting both your company and your employees.
1. The Challenge of Traditional Salary Increases
When planning a salary increase, most companies usually consider a percentage increase in gross salary. The main problem with this is that a salary increase directly impacts associated business costs, such as Social Security contributions, and increases the employee's income tax withholding. This significantly raises the cost for the company more than desired without proportionally increasing employee satisfaction, as they end up receiving less than expected.
For example, if you increase the gross salary by 10% for an employee earning €30,000/year—that is, a €3,000/year raise—the incremental cost the company must face is €4,000/year, 33% more (technically €3,959.40), due to the social security contributions the company must pay.
On the other hand, the employee will only receive an additional €1,937 in their net pay, due to the increase in tax withholding. In other words, more than 50% of the cost for the company is diverted to taxes and social contributions that the employee never sees, generating disappointment and frustration for both. A very common drama in our country...
2. Employment Pension Plans: An Efficient Alternative
However, this can be mitigated and improved with Employment Pension Plans, a more efficient alternative for managing salary increases and satisfying employees. Instead of making a direct increase in gross salary, part or all of it can be structured through an Employment Pension Plan. This way, the employee receives higher net compensation, and it costs the company less as it benefits from tax deductions and a reduction in social contributions. Let's understand how it works.
2.1. Lower Income Tax Impact for the Employee
One of the greatest benefits of Employment Pension Plans is the reduction of the employee's income tax base. By allocating part of their salary increase to the pension plan, the employee doesn't pay tax on that amount at the time, which reduces the monthly withholding and improves their net salary. Additionally, in the medium and long term, the employee is saving and has a solid financial forecast. You sleep more peacefully and happily when you have savings.
2.2. Reduction of Social Security Costs Paid by the Company
The contributions the company makes to the employment pension plan generate a reduction in social security contributions, in addition to deducting from the corporate tax base. Instead of paying 23.6% in common contingencies on the salary increase, the company obtains a reduction in common contingencies proportional to the contribution. As a result, the total cost per employee decreases, allowing companies to offer salary benefits without representing an excessive increase in their expenses.
This is better understood when you see the numbers in a practical example.
3. Practical Case: Let's Compare a Salary Increase With and Without a Pension Plan
Imagine you're going to give a 5% salary increase to an employee who earns €30,000 gross per year—that is, a €1,500/year raise—and you're considering using an Employment Pension Plan.
Let's compare by looking at the numbers that really matter: what it costs you and what reaches the employee, whether you do it by only increasing the Gross Salary or with an Employment Pension Plan.
We see that using the Employment Pension Plan achieves a mutual improvement: the employee receives more and it costs the company less. That is, via the Employment Pension Plan, the salary increase is more efficient since the company faces an extra cost that is 17.9% lower, while the employee receives 13.3% more money in their annual compensation.
You don't have to increase the entire salary with a pension plan—you can make part of the increase via gross salary and another part via the Pension Plan. That's why we've developed our salary increase simulator, where you can set up multiple scenarios and see the impact, including all the details in the paycheck.
4. Salary Increases with Lower Cost and Greater Impact
Implementing an Employment Pension Plan as part of a salary increase is not only an efficient measure but also improves employees' perception of their compensation. If this plan is properly explained and communicated, it considerably improves employee engagement with the company. Employees receive more long-term value, improving their financial security, while the company optimizes its labor costs and benefits from tax incentives.
Using Employment Pension Plans as a tool for salary increases is a smart strategy. The company reduces costs thanks to tax incentives, while employees enjoy higher net compensation and tax benefits on their income tax. All this makes the Employment Pension Plan an advantageous option for both employees and employers.
If your company is considering a salary increase, don't miss exploring how the Employment Pension Plan can help you optimize this decision. Try our simulator here to see the impact on your company and on your employees' paychecks.