The True Cost of Employees

Dear Anita,

My wife and I have a mom-and-pop shop with a dozen employees. One of my workers acts like I’m being a cheapskate with his salary, hinting he deserves a big year-end bonus. I try to pay a competitive wage, but I have to make a profit, too. How can I communicate the economics of a small business?

Dear, Pops,

Total_Compensation_Statement

Payscale’s Total Compensation Statement shows the employer’s contribution in addition to the wages.

Employees often think that their salary is the only cost to the employer for their services. They often do not realize that taxes, workers’ compensation insurance and even the cost of “Mom” completing the paperwork can cost your business another 30 percent in payroll costs.

I assume that you have done salary comparisons for the job title in your geographic region to ensure that you are, indeed, paying a living wage that rivals your local competitors. If you are, a little education may illuminate the realities of employer-paid contributions to all of your employees.

“Total Compensation Statements” can include line items such as:

  • Base pay
  • Bonuses
  • Vacation/PTO/sick days and other paid leave
  • Payroll taxes (Social Security match, Medicare, state unemployment insurance tax)
  • Employer-paid portions of insurance plan premiums (health, dental, vision, life, disability
  • Employer contributions to employee’s retirement plan, such as a 401(k) or pension
  • Stock options or profit sharing
  • Annual usage value of a company car
  • Value of any other fringe benefits offered, such as:
    • Fitness club membership
    • Cell phone service
    • On-site child care
    • Free or discounted public transportation or parking
    • Tuition assistance/professional development
    • Company discounts

Non-quantifiable perks may include flex time or on-site facilities available for employee use. For new hires, include one-time benefits, such as relocation expenses or signing bonuses. There are handy Total Compensation Calculators online.

While a Total Compensation Statement can illustrate the true cost employers pay for an employee, it has the potential to backfire as a teaching tool. Workers may feel you are fudging the numbers if you “double-count” vacation or PTO and they don’t really receive additional pay. Also, if an employee does not use a perk, such as child care, then the value is moot for them. A pitfall with salaried employees may occur if they feel any overtime is not valued since it won’t be reflected in the compensation.

Employees who may be shocked to learn that their $40K annual salary is actually costing their bosses around $52,000 may be a little more grateful, or at least have a greater understanding of the realities their employers face.

Readers: Have Total Compensation Reports opened your eyes to the true costs your employer faces?

Do you have a job-related question? Ask Anita.

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5 Comments (+add yours?)

  1. Tiffany Lieu
    Dec 04, 2015 @ 10:43:21

    I think so. Everything costs these days. The way many employers have been cutting back benefits over the years, they are trying to stay in business and minimize costs very likely. If you want/need a job, you really should not bypass certain employers just for the duration until transitioning to another employment. Especially if you need pocket money that can take a while to search.

    Reply

  2. Easton Peterson
    Dec 01, 2015 @ 10:57:52

    I think my reply must have gotten lost. It’s very important, so I’m reposting, and I’m making sure that I’m totally clear this time:

    This is how that actually works. If you are unhappy as a worker with the work you do and the compensation you receive, you need to change your circumstances. If you are unable to, then you are simply uncompetitive as a worker, and so first you need to change that, then find a job that suits you and your needs much better.

    If you are an employer and you really need to retain the employees that you have, then you need to pay for that, or you are simply uncompetitive as an employer. There is no employer welfare for your business overhead where you just get granted cheap labor so that you can show a profit. You have to actually work for money, just like your employees have to.

    Reply

  3. Cathy
    Dec 01, 2015 @ 08:22:30

    It was a good reality check for me to see how much I actually cost the county when I worked there. It helps me to be more patient toward other potential employers, too.

    Reply

  4. Easton Peterson
    Dec 01, 2015 @ 08:05:55

    No, no, no, no, and NO. Your employee needs to simply go where he/she is better off/better paid. If for some reason you want to hold on to that particular employee, you had better pay for that, or else you are simply not competitive.

    Reply

  5. Douglas Fedder
    Dec 01, 2015 @ 06:09:31

    I think it is important for the employer to discuss actual cost of employment with their employees and make them understand that. However, in the employees defense extensive research such as this article http://www.nber.org/papers/w4542 does show that profit sharing and bonuses do increase productivity. So the employer should consider some kind of incentive that if the employee directly relates to an increase of profit within the company then some kind of bonus is in order! But again that’s assuming that the quality/quantity of the employees work is directly correlated with profit (I rarely know a case where it isn’t).

    Perhaps they should have a sit-down and discuss what the employee can do to earn such bonuses, but that’s assuming that the employer has all their ducks in a row. It can put that employer in quite a negotiating bind if some sort of mismanagement or unfairness between employees is limiting the employees ability to create profits for the company.

    Reply

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Disclaimer

Anita Clew's blog posts are intended for general guidance and should never be taken as legal advice. In all instances where harassment, inequity, or unfair treatment is believed to be present, please consult your HR Department or legal representation.
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