What Is 13-month Pay? Get a Deep Insight into This Popular Payment

Introduction

The 13th-month pay may be used as a buzzword in employment practices. In reality, however, a 13th-month pay, or salary, goes well beyond additional pay-perk employers provide to employees and contractors for better performance, job security, and overall stability outcomes.

Specifically, a 13th-month pay is one of many options employers might contemplate. Even when such a practice is not required or established as a convention in a given jurisdiction — to maintain a balance between local compensation compliance requirements, if any, and additional benefits to attract and sustain more skilled workers.

Understanding why and how you, as an international employer, may or may not provide a 13th-month pay is more than just additional expenses to be appreciated by your employees and contractors. Instead, by introducing a 13th-month pay, you widen your benefits portfolio to include more options for your diverse workforce.  

Putting your planned 13th-month pay in context requires an in-depth understanding of what an additional payment is and when and how it's paid.

This guide walks you through a much-hyped end-of-year payment highlighting all you need to know about making the most of any additional payments you make to your employees, contractors, and more.

What does a 13th-month salary mean?

The 13th-month salary is an end-of-year payment made to employees by employers as an additional incentive. Think of the 13th-month pay, in a narrow sense, as a gesture of employer generosity to make employees happy.

Usually confused with a Christmas bonus, a 13th-month pay is not a bonus but a practice established in several jurisdictions. The Philippines and Singapore have utilized it since the 1970s, and since then, it has spread worldwide. Taken up by US, European, and African countries, the 13th-month pay has gone well beyond a convention — or a gesture of employer generosity — into an increasingly attractive method for employers and employees to establish an employment rapport.

How is a 13th-month pay calculated?

Calculating how much your employees should be paid a 13-month pay depends on many factors, including:

• The payscale in your given jurisdiction
• Each employee's monthly salary
• Whether you're paying manually or using any automated methods
• Whether you're paying your employees according to the Georgian or Chinese calendar

In Hong Kong, for example, the 13-month pay is calculated on a proration basis. The proration system calculates the total number of days an employee spends in service divided by the number of days in a calendar year. The following factors are considered in calculating the 13-month pay in Hong Kong:

• 100% of base salary
• Salary day: December 31st
• Cutoff day: November 1st
• Proration formula: [(Service period in year) / (Calendar days in year)] × (basic salary)

That should give you an idea of how the 13-month pay calculation is not — once again — a one-size-fits-all process. This is where established HR and payroll service platforms like Skuad come in.

Is a 13-month pay a bonus?

The short answer is no. The 13-month pay is, as noted, an established convention and, in a few jurisdictions, such as the Philippines, is only mandated by law. The only common factor between the 13-month pay and a bonus is that both are paid in cash to employees. They differ, however, in many ways:

• While the 13-month pay is complimentary, bonuses are performance-based.
• While the 13-month pay is generally fixed, bonuses vary according to performance and corporate profits.
• While the 13-month pay can be suspended (unless mandated by law), bonuses cannot be because bonuses are generally statutory rights employees are entitled to, provided that certain performance criteria are met.
• While the 13-month pay is a relatively new practice, bonuses are quite old practices.

Think of a 13-month pay — in addition to being a gesture of employer generosity — as an evolving practice you may tweak to your ends in ways beyond conventional bonus-based reward systems. While bonuses remain essential in any work environment, employees, particularly more skilled ones, need more internal motivators and rewards to be even more productive.

For example, you may use a 13-month pay as only one of many rewarding methods you have in place to establish a sense of unity among everyone in your business. The 13-month pay is generally about "generosity" and less about money per se. So ensure you use your 13-month pay wisely and creatively.

When is a 13-month pay given?

According to general practice in many jurisdictions, the 13-month pay is given by year-end, usually December 24th. The underlying rationale for paying employees a 13-month salary by year-end is that the end of the year is a high-spending season when people celebrate Christmas (or, in the case of Hong Kong, Chinese New Year). This makes a 13-month pay a generous gesture given by employers to emphasize a sense of family among employees and between employers and employees.

Making the most of your 13th-month pay

The 13th-month pay is generally an established practice in many jurisdictions to boost morale and promote the end-of-year celebratory atmosphere.

Calculating the 13th-month pay depends on several factors you, as an international employer, need to consider so your end-of-year payments are consistent with local practices. You'll also need to comply with local laws and regulations where such practice is mandated.

The distinction between a 13-month pay and a bonus should, moreover, be clear by now.  

However, giving a 13-month pay by year-end differs from a set-in-stone rule.

That is, while you as an employer may follow local practices to give your employees and contractors a 13-month pay by year-end, you can be more creative by

• Splitting up any 13-month pay you have or will have into smaller "generous" payments made every quarter
• Structuring any 13-month pay you have or will have into a combination of performance and end-of-year payments based on each employee's service record
• Offering points, not cash, for your employees to redeem any negative performance parameters over a month, quarter, or year.
• Establishing a month-by-month complimentary payment system where employees who may not wish to receive a 13-month pay year-end can convert accumulated payments into stock options provided by your benefits package.

You can use a 13-month pay many ways, and choosing the right one is up to you. On the other hand, you can engage an established global employment and payroll platform such as Skuad to help you manage your 13-month pay to your employees.

Skuad enables organizations to hire employees, onboard talent, manage payroll, and administer benefits such as the 13th-month pay for employees in over 160 countries. With Skuad, you can carry out every HR and employment-related activity in compliance with country-specific employment laws without setting up a subsidiary. 

To know more about Skuad, book a demo today.