The ‘teenth month payments

Or… Re-thinking salary payments over the course of the year for the benefit of staff.

Photo by Alexander Mils on Unsplash

TL;DR¹

Offering a 13, or 14 month pay period is a way to give the same annual salaries to employees, whilst giving a larger salary payment at certain points in the year, to help cover high expenditure periods.

This article goes through the explanation, implementation, and pros and cons of such a system, whereby the monthly salary is reduced, compensated by a larger salary either once, or twice a year.

Overview

13 or 14 months in a year?

Offering a 13, or 14 month pay period is a way to give the same annual salaries to employees, whilst giving a larger salary payment at certain points in the year, to help cover high expenditure periods.

This can be common in some european countries, and in most Latin American countries. Taking Italy as an example, where there are large expenditure periods twice a year, they use a 14 month salary to help employees easily cover the costs. In Italy, the two periods are:

• In August where the summer temperatures almost shut down the country, so they all go on holidays, and
• The Christmas period

Note: The implementation that is described in this document is not the same thing as some international implementations. For example, in South America, there are laws around the 13 month payments, and how salaries are calculated.

Quick Example: ‘teenth Month Salary

in a very small nutshell — the formula is very simple:

1. 1/13th of monthly salary after taxes is accrued by the business and not paid to the employee
2. The accrual is paid out either once or twice yearly, or the accrual is paid out upon leaving employment

13 months (double ‘salary’ payment, once a year):

• For a person who has a monthly salary of $1,000 (after taxes, superannuation etc.)
• Instead of getting paid $1,000 in to their bank account, they get paid $923.08, and once a year (in these examples — December is the assumed month) they get paid $1,846.15 which is 200% of what people get paid in non ‘bonus’ months

14 months (1.5 times ‘salary’ payment, twice a year):

• For a person who has a monthly salary of $1,000 (after taxes, superannuation etc.)
• Instead of getting paid $1,000 to their bank account, they get paid $923.08, and twice a year (In these examples —June and December are the assumed months) they get paid $1,384.62 which is 150% of what they would normally get paid in non ‘bonus’ months

Pros and Cons

The pros are generally for the wellbeing of staff, whilst the cons are generally focussed around the impact to the company and the additional burden that it may create.

Pros

• No change to people’s annual salary.
• Gives people a salary ‘bump’ when they need it the most.
• When the 13th month is offset 6 months after a bonus payment (if applicable), this creates a nice cadence of additional payments every 6 months.
• Provide flexibility around payments to people — for example the ‘teenth month may be August when the person takes their biggest annual holiday.

Cons

• Additional burden on the company to ensure that salary payments are calculated correctly.
• Having to hold people’s salaries in ‘escrow’ until the ‘teenth month(s) arrives.
• May get complex with should people want to drop in or out of the system at specific times.
• May not fit in with the end of tax year, how does this taxation fit in with bonus payments etc.
• Possibly need some legal framework to be implemented by the company.
• This may be hard to be reflected on payslips, causing confusion for staff.
• People may be unwilling/unable to afford the 7.69% accrual.

Motivations

At the heart of this, is the ability to support those people who would like to have additional financial flexibility in high expenditure periods. By saving 7.69% of their monthly salary as an accrual, people then get this back in a lump sum when most needed.

• In high expenditure periods, it is nice to give people the additional flexibility with cash flow.
• It gives the appearance of additional salary (either 150%, or 200%) in the bonus months.
• No additional tax burdens on employees, as taxes and superannuation is still deducted at source, the accruals are just held in ‘escrow’ for them until the ‘bonus’ month(s).

How it works

Salary calculations, including deductions (taxes, superannuation, etc) remain the same, the only difference is the amount that is paid to the employee per month. Each month, for an employee’s salary, the majority gets paid to the person, whilst a small percentage gets accrued. This accrued salary then gets paid in the ‘13th’ (and, possibly the ‘14th’) month.

There remains 12 payment cycles every year, in the case of payments being calculated on 13 months, a larger monthly salary is received once a year. In the case of payments being calculated on 14 months, a larger monthly salary is paid twice a year.

For ease of demonstration, taking an example where a person’s salary after deductions is $1,000 per month.

An image of a table showing the caulculations of 13 and 14 month salaries

Implementation: 13 month years

Instead of taking the full salary of $1,000, the person opts to have a 13 month payment year, with a constant salary payment paid each month and in the ‘teenth month a perceived ‘200%’ salary is paid.

Each month, 92.31% is paid to the employee, whilst an accrual of 7.69% is made. At the end of the year (i.e. ‘teenth month), this accrual is then paid on top of the employee’s salary.

Calculation and example

Take home salary is divided into 13 equal payments. Each month 1/13th of the salary is paid, In the final month (or the so called 13th month), 2/13ths are paid to the employee.

So instead of getting $1,000 paid each month, the person now has a:

• Monthly take home salary of: $923.08
• Monthly accrual each month of: $76.92
• ‘Teenth month (e.g. December) take home salary of: $1,846.15
• Compared to all the other months, this is seen as a double salary payment compared to the rest of the months — i.e. $923.08 * 2

Payment Schedule

With the assumption that the ‘teenth month is December.

An image of a table showing the salary payments for thirteen month payments

Notes:

• The line highlighted in green is the ‘teenth month where the ‘teenth-month salary is paid (i.e. all accruals to that date are then paid to the employee)
• The green outlined boxes show that the annual salary is the same, despite the fact that the ‘teenth-month is paid once a year.

Leavers before the ‘teenth month

With the assumption that the ‘teenth month is December.

An image of a table showing the accrual that would need to be paid out to an employee depending on the month that the person leaves

Notes:

• The line highlighted in green is the ‘teenth month where the ‘bonus’ salary is paid (i.e. all accruals to that date are then paid to the employee)
• The column ‘Monthly Pay if Leaving’ shows the amount that the employee gets paid should the person leave at the end that month. (note: that should a person leave within the month, then calculations would need to be performed on a pro-rata basis)
• The green outlined boxes show that the annual salary is the same, despite the fact that the ‘bonus’ is paid twice a year.

Implementation: 14 month years

Instead of taking the full salary of $1,000, the person opts to have a 14 month payment year. The payments and accruals actually work out to be the same, it is just that there are now two ‘teenth months instead of one, with each ‘teenth month being paid at 150% of other months.

Each month, 92.31% is paid to the employee, whilst accruing 7.69%. Twice a year, the accrual is then paid on top of the employee’s salary.

Calculation and example

Take home salary is still divided into 13 equal payments. Each month 1/13th of the salary is paid, In the ‘teenth months (or the so called 13th and 14th months), 1/26th (or 0.5/13) are paid to the employee.

So instead of getting $1,000 paid each month, the person now has a:

• Monthly take home salary of: $923.08
• Monthly accrual each month of: $76.92
• June and December (i.e. 13th and 14th months) take home salary of: $1,384.62
• Compared to all the non-‘teenth months, this appears to be a 150% salary payment — i.e. $923.08 * 1.5

Payment schedule

With the assumption that the ‘teenth months are June and December.

An image of a table showing the salary payments for fourteen month payments

Notes:

• The lines highlighted in green are the ‘teenth months where the ‘bonus’ salary is paid (i.e. all accruals to that date are then paid to the employee).
• The column ‘Monthly Pay’ shows the amount that the employee gets paid
• The green outlined boxes show that the annual salary is the same, despite the fact that the ‘bonus’ is paid twice a year.

Leavers before the ‘teenth month

With the assumption that the ‘teenth months are June and December.

An image of a table showing the accrual that would need to be paid out to an employee depending on the month that the person leaves

Notes:

• The lines highlighted in green are the ‘teenth months where the ‘bonus’ salary is paid (i.e. all accruals to that date are then paid to the employee)
• The column ‘Monthly Pay if Leaving’ shows the amount that the employee gets paid should the person leave at the end that month. (note: should a person leave within the month, then calculations would need to be performed on a pro-rata basis)

Implementation: Variable monthly payments

In the case where an employee has variable monthly payments (e.g. month to month the salary may differ slightly/significantly) then the same formula could still be applied.

• Monthly take home salary of: 12/13ths of the monthly salary
• Monthly accrual each month of: 1/13th of the monthly salary
• ‘Teenth month (e.g. December) take home salary of the accrual

Possible hurdles for implementation

Is the implementation hurdles too burdensome to warrant implementing?

It may be the case that the actual implementation details become too complex, or not possible — although I would argue that where there is a will, there is always way

What would payslips look like?

Payslips are very much tied in with the taxation system and what people get paid into their account — showing salary, taxes, superannuation, amount actually paid.

In the case that the payslips remain the same, the amount paid to the bank account would not match the amount on the payslip (it would be less).

Accrual would have to be shown somehow on a payslip, or at least access to something which would allow people to see the accrual.

What is the burden for showing the accrual each month?

Firstly, would this actually be something that is wanted? Is it not better to have a ‘surprise’ payment through the ‘teenth months?

Cash flow/profit for the business

Holding the additional cash for the accrued wages may become quite significant — this would have to be taken into account when forecasting cash-flow and profit and loss.

Not only that, if the business were to fold, what guarantees would there be that the employees would get their moeny?

Finally, how does this tie into financial reporting to the tax office?

Tying this all together

The ‘teenth month scheme has had quite a bit of success in countries throughout the world. Why not adopt it in your company?

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Footnotes:
¹ a TL;DR section is included in every article, so that the main points are highlighted, you get to decide whether this story is of interest, and quickly move on if there is nothing there for you [source: Too long, didn’t read — TL;DR]