#CostaRica 🇨🇷 #BDS_Article: Successes and Failures in Corporate Compensation Schemes

When designing a compensation scheme, companies typically consider two fundamental objectives: how to avoid increasing their direct costs and how to ensure that the system remains attractive to their workforce. Achieving these goals can be challenging, given that Costa Rican legislation is relatively inflexible on these matters, and missteps can lead to highly sensitive consequences.

The situation becomes even more complex when we consider certain indicators in the country that make the specific situation and the inspection policies of the relevant authorities to be focused on certain aspects directly associated to compensation schemes. Some of these factors include: the presumptive salary nature of benefits, reporting requirements to social security, its inclusion in the calculation of labor entitlements, tax implications, and potential changes to such conditions over time. Additionally, it is worth noting that public authorities' powers of oversight can extend up to ten years retroactively.

Given this context, it is crucial for companies to understand which elements of compensation schemes have proven to be safe, which carry risks, and what aspects could be introduced into their organizations to strengthen, improve, or implement for the first time a competitive and profitable compensation structure. Let us start with the negative experiences.

When discussing failures in this area, at least five highly risky practices stand out: lack of regulation of the components of the compensation scheme; failure to anticipate changes over time; individual Key Performance Indicators (KPIs) that are not reported to the social security administration; relying solely on salary-based components in the compensation scheme; improper use of variable salary structures and irregular use of non-salary components, such as reimbursements and bonuses.

These fundamental pitfalls can be summarized as follows: every benefit must be regulated, as this will form the evidentiary basis to determine its nature, frequency, conditions for recognition, and scenarios where the employer would not be required to pay such benefits (either partially or fully).

Compensation schemes must anticipate changes since static arrangements in this area are unusual. The rule is to adapt benefits according to the employer’s economic capacity, interests, and corporate strategy. Additionally, it must be reminded that any periodic, customary, and generalized benefit could be considered salary. Thus, if your company fails to monitor the evolution of benefits over time, you may inadvertently create a highly costly component.

This tendency toward salary classification can be particularly risky without a thorough review of the scheme. There may be complex and highly attractive KPIs that reward the company’s overall performance and general yields but fall into the trap of incorporating individual workers’ performance or effort indicators. Such inclusion automatically renders the benefit a salary component. Worse still, if employers hastily introduce other compensatory elements, assuming they are non-salary simply by name, these elements may ultimately take on the characteristics of salary. For instance, covering employees’ personal expenses as reimbursements could eventually be classified as salary in kind.

Turning to successful practices, we can identify some key strategies every organization should consider. First, it is essential to understand that a compensation scheme can draw from four main categories: salary-based, non-salary, reimbursements, and labor indemnities. It is important to highlight that compensation need not rely solely on salary-based components. Solidarity associations can also play a vital role within the compensation framework. Maximizing the adaptability and sustainability of fixed-variable schemes is another critical aspect. These schemes should cater to the specific characteristics of your workforce and not replicate measures without prior analysis.

The old saying holds true: don’t put all your eggs in one basket. If your company has not explored the advantages of leveraging non-salary components, such as reimbursements and labor indemnities, now is an excellent time to seek strategic advice. Thinking outside the box also involves identifying allies, such as solidarity associations, in which many employees find a highly supportive and appealing aid, without negatively impacting employer profitability.

Another factor to consider is making the most of fixed-variable schemes. Such structures should reward business growth; therefore, a scheme that thoroughly dives into it should not be dismissed as long as they align with your corporate objectives and are supported by your company’s performance. Finally, you should see the design of a compensation scheme as an opportunity to connect with your employees, understand their needs, and plan for the short, medium, and long term. Cutting corners by copying other schemes could lead to adopting unsustainable practices or even inheriting flawed approaches by default.

Cristhian José Monge Arce

Partnet at BDS Asesores