Labor Pains - 3
Count Fringe Benefits in Total Pay Package
INDIANOLA, Iowa (DTN) -- A steady stream of cash is often the most difficult thing to raise in a farm operation. Also, labor costs divert that stream right off the top. So how do you balance a "high enough wage" to attract a good employee with the need to maintain a positive cash flow?
If you want to manage your labor costs, you need to look at the total compensation package, advised Dick Wittman, who manages a diversified crop, range cattle and timber operation in northern Idaho in partnership with three other family partners. Wittman also has a farm consulting business.
When hiring a new employee, rather than say, "This position pays $2,500 per month plus benefits," it's better to say, "This position is worth $65,000 to $67,000 per year which includes on-farm housing, utilities, health insurance, a farm vehicle and other benefits plus $2,500 per month in wages," said Wittman. You can also point out that if you include tax savings, the employee would have to earn $82,000 in town to equal that compensation package.
Wittman uses a summary form that adds up total compensation to show a prospective employee. For example:
Housing -- $1,000/month
Utilities -- $300/month
Meal allowance -- $6/day, 270 days at the farm
Beef -- 1/2 beef, 350 pounds @ $4.50/lb.
Health Insurance -- $450/mo.
Use of a pick-up truck -- $5,000/year
Vehicle fuel and maintenance -- $3,000/yr.
Retirement contribution -- 7% of $2,500/mo.
He totals the annual cost in a table to show the employee. In this example, the non-taxable benefits exceed $35,000 annually. Adding that to $30,000 in annual cash wages equals $65,000. In years where there is a bonus (say, $2,500) total compensation climbs to $67,500. If you consider tax savings (we used 30% for total federal, state and Social Security taxes), you would have to make an equivalent $82,500 per year (assuming no benefits), or $33 per hour in town to equal this compensation package working 2,500 hours per year.
That's a pretty convincing argument that the employee's total employment benefit is more than simply the amount on the paycheck.
USE A CAFETERIA APPROACH
It's an educational process to show compensation is more than a salary or wage. There is a value to the benefits you can provide. However, not all employees want or need the same benefits. You need to take more of a cafeteria approach to compensation, noted Wittman. It's true that most employees just look at the payable amount in their paycheck. But when you are recruiting talent, you can say, "I can only pay so much for this job, but we offer other benefits that can be of value to you." Wittman gave an example of boarding the employees' horses at your farm.
When you point out the total pre-tax value, some people get it and some don't, Wittman noted. "Doing a compensation summary analysis shouldn't just be a one-shot deal. It is a good practice not only with non-owner employees, but also farm owners providing labor and management. All compensated parties need a periodic reminder of the intangible benefits they are getting."
At The Executive Program for Agricultural Producers (TEPAP) in 2014 -- where Wittman serves as an instructor -- more than 100 farm operators from across the U.S. paid themselves a median non-taxable compensation of $26,000. That's on top of their regular salaries, but something they, their spouses or their partners may be undercounting in their compensation packages.
What appeals to owners and what appeals to wage earners may differ. According to AgCareers.com 2013 Total Rewards Survey, the most valued rewards and benefits among more than 1,795 ag employee respondents were:
Heath care benefits -- 72%
Retirement savings plan/employer match -- 67%
Paid time off (vacation, sick, personal paid days off) -- 65%
Challenging and meaningful work -- 62%
Health care plans are in flux currently as the Affordable Care Act is being implemented. Depending on your state, some employees may be better off buying their own health insurance on the state exchange and having the government subsidize their premiums. However, under the new law, reimbursing employees for their premiums or other health care costs may result in a fine to your business. Be sure to talk with your tax adviser before reimbursing employees for health care costs that are not part of your group plan.
It's also important to have the correct wording and situation when paying for employee housing, meals and farm vehicles if you want a tax benefit. The employee must be required to live and eat (the meal you provide) on the farm property as a condition of his job. IRS has very specific rules, so check your situation with your tax adviser.
"Sometimes we have to make it clear to the tax adviser that the meal we pay for is not a meal/entertainment employee reimbursement expense, but rather a fully deductible labor expense to the business and a tax-free benefit to the employee," said Wittman. "We'll pay an employee's wife $6 per day to make lunch for the 270 days our employee needs to work through lunch and we pay it quarterly," he explained.
Another issue when it comes to compensation is what exactly you are being paid for; this needs to be clearly understood, advised Danny Klinefelter, Texas A&M ag economics professor who specializes in agricultural finance and management development. "There's base pay and then there's profit-sharing and then there's performance incentives and then there's return to ownership (for those with ownership interest in the farm)," Klinefelter noted. "People do compare their paychecks, even if they're not supposed to. The more ambiguous how a paycheck is determined, the more problems you have when people compare what they are being paid.
"One of the big things with closely held businesses is the need to separate rewards into different components. Employees need to understand they are not getting paid differently for the same job. A family member may be getting paid more as a return to their ownership. Another employee may be getting more because he exceeds performance standards," Klinefelter explained. "You need to make your 'good year' bonus separate from their base pay.
The reality is we are in a competitive marketplace and we have to be willing to pay for the caliber of person we want working for us, said Wittman. "Don't expect your employees to subsidize your business. I don't want my employees to have financial stress, so a competitive wage is important. I want them to know the value of all the benefits -- cash as well as intangibles -- they are receiving. This helps them feel more appreciated as well as compensated competitively."
Editor's Note: In this occasional series, DTN details how to recruit and retain a talented farm labor pool. Read past installments at http://www.dtn.com/….
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