Labor Costs

Posted by PITHOCRATES - November 19th, 2012

Economics 101

Small Business Owners may have Nicer Homes but Chances are they are Mortgaged to the Hilt

A lot of people think business owners are cheapskates.  Greedy bastards.  Who hate their employees.  And try to pay them as little as possible.  Not for any business reasons.  But just because they are so greedy.  And hateful.  During bad economic times when the employer has to make some cuts labor leaders will tell the rank and file don’t believe the employer.  “Just look at the house the boss lives in.  And the house you live in.  Whose is better?  Bigger?  That’s right.  The boss’ house is.  Always remember that.”

Yes, bosses may have nicer homes.  But chances are they are mortgaged to the hilt.  Not to mention the fact that these bosses may be working an 80-hour week.  Which is not uncommon for a small business owner.  Especially during bad economic times.  As they may be negotiating with creditors, their banker, their vendors, keeping their customers happy and trying to find new customers.  While the rank and file work their 40 hours, collect their paychecks and enjoy their free time.

So it’s not easy being the boss.  That’s why so few people want to be the boss.  For it’s easier being an employee.  You work.  You get paid.  And you leave work at work.  Even if you think you’re not being paid as much as you deserve to be.  Something most employees feel.  That they’re overworked.  And underpaid.  But they never look at things through their employer’s eyes.  And see what they really cost their boss.

Most Businesses have gone from a Defined Benefit Pension Plan to a Defined Contribution 401(k)

What an employee gets paid and what an employer pays for that employee are two different things.  To begin with an employer pays for more hours of an employee’s time than he or she actually works.  When you factor in vacation time, holidays and sick days an employer may pay for 2,080 hours while the employee only works 1,896 hours.  If an employee makes $35 an hour those nonworking hours can add up to $6,440.  Which an employee gets for doing nothing.  We call them fringe benefits.  Just an employer’s way of saying, “Hey, I don’t hate you.  Here’s some money for doing nothing.”

Why do they pay this?  Because of free market capitalism.  If they don’t pay it someone else may.  And attract their good workers away from them.  Because if there is something employees will do is jump ship the moment they get a better offer.  Which is a good thing.  This is supply and demand.  And despite workers feeling overworked and underpaid this free market dynamic makes sure employees get paid as much as they can while helping employers pay as little as they can.  That equilibrium point where employees will keep working.  While leaving employers still competitive.  Though that’s getting harder and harder to do these days.  As the cost of doing business has never been higher.

In addition to these fringe benefits there are also health insurance, life insurance and retirement contributions.  With health care often being the greatest single employee cost to a small business owner.  Which is why most now make employees pay a small portion of their health care these days.  Retirement contributions have also gotten very costly.  Few people still have a defined benefit pension plan these days.  Typically an owner will offer a defined contribution 401(k) for the employee to contribute to.  And if times are good the employer may match their contribution up to a certain amount.  But employers will call this a discretionary contribution.  And it will be one of the first things to go when they are having cash flow problems in a bad economy.

The Last Thing a Business Owner needs while trying to Deal with Soaring Labor Costs are more Costs and Taxes

In addition to fringe benefits there are payroll taxes and insurances.  Such as Social Security.  Which the employer and employee split.  At least in theory.  The employer currently pays 6.2% on the first $110,100 in an employee’s earnings.  The employee kicks in 4.2% (which may go up another 2 points after the fiscal cliff, as that tax cut expires).  In reality the employee doesn’t pay any of this.  They get their check and go on their way while the employer has to find the cash to pay the 10.4% due.  For an employee earning $66,360 that Social Security tax payable comes to $7,571.  Another big check the owner has to write is for state unemployment.  Which can be anywhere around $4,000.  The following chart summarizes these and additional labor costs (note: the retirement contribution is probably between a 401(k) matching contribution and a defined benefit pension contribution).

An employee with a pay rate of $35/hour will gross $66,360.  Deductions will lower actual take-home pay.  But the employer’s total cost for this employee in this example is $108,252.  Or an additional $41,892 than the employee grosses.  Which comes out to another $17.04 an hour.  Something the employee never sees.  This is why labor is so costly.  And why employers want to hire as few people as possible.  For each additional employee they hire (in this example) they have to pay an additional 22.2% in payroll taxes/insurances.  And an additional 41% in fringe benefits.  Or a combined 63.1%.  In addition to what they’re paying the employees for their actual work.

And this is why employers want to offload health care (especially for their retirees).  And their pension liabilities.  As they can add an additional 30% (or more) to their labor costs.  What started out as fringe benefits to attract some of the best workers is now bankrupting many companies.  People are living so long into their retirement that these cost are growing faster and larger than any other cost a business has.  And it’s also why small business owners are very worried about new regulations and taxes.  For the last thing they need while trying to deal with these soaring labor costs are more costs.  Or taxes.  Which doesn’t make them cheap or greedy.  It just makes them very cautious business owners who are trying to keep their businesses afloat in an ever more difficult business environment.

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FUNDAMENTAL TRUTH #72: “Moms are a lot like CEOs. Only with more responsibility, longer hours and less pay.” -Old Pithy

Posted by PITHOCRATES - June 28th, 2011

Thinking and Deciding

Boy, do people like to demonize CEOs.  I mean, they really hate them.  These chief executive officers.  Overpaid and underworked.  And then there are all those stock options.  Making them bazillionaires.  By increasing the value of the company to shareholders.  Without a whit of concern for the little guy on the factory floor doing the work.  It just isn’t fair.  Sitting in their plush offices.  Flying in their private planes.  Staying in 5-star hotels.  Living in mansions while vacationing on some island paradise that they might in fact own.  Living champagne and caviar lives.  For doing what?

Actually, for doing quite a lot.  Mostly thinking.  And deciding.  Making decisions that will impact every employee of the company.  Now.  And years into the future.  Decisions that will determine if there is even a future.  For a corporation is like a ship.  It is large.  Complex.  And has momentum.  It can’t turn on a dime.  One decision today could steer that ship into open waters for clear sailing.  Or into an iceberg. 

The world is a changing place.  Nothing is static.  Including the economy.  And consumer spending.  For the consumer can be a fickle person.  We know what they’re buying today.  But no one knows what they’ll be buying tomorrow.  And that’s the problem CEOs face.  The things they’re making today will sell tomorrow.  Or later.  In fact, factories they build today will make things that will sell years later.  So the decision to build that factory had better been a good one.  Based on some good market research.  Objective analysis.  With no personal prejudices involved.  Such as laughing at new innovation.  Saying there’s no way it will replace the current industry standard.  Such as a phone company not getting in to the cellular business because everyone will always have a landline into their house.  In fact, they’ll have a few.  One for their phone.  One for their fax machine.  And one for their dial-up modem.  “And what could ever change that?” said the fat-cat phone executive while chomping on a cigar.  Shortly before the board of directors fired him.

Pay not Commensurate with Responsibilities

Moms are lot like CEOs.  They, too, have to look long-term.  And it starts with choosing a husband.  When they are ready to settle down and raise a family.  And they’re not going to waste their time with men who don’t want to settle down.  Like Beyoncé says, “if you liked it then you shoulda put a ring on it” (Single Ladies).  It’s no longer about dating for fun.  It’s now about finding a life partner.  And women will choose carefully.  They’re looking for someone with a good job.  Someone who is responsible.  Someone they can trust.  Someone who is healthy and will sire healthy children.  Someone who is strong and self-confident.  Who can be both a provider and protector.  Perhaps someone who goes to church.  So they can bring their children up with strong morals.  They’ll start choosing their dates based on these criteria.  Then love can enter the equation.  Which it does.  And it’s often a deeper and more long-lasting love.  Because attraction is based on all of these things.  Not just physical appearance.

This decision is important to be a good mom.  Because it will affect the next 20+ years of her life.  And it will affect the lives of her children.  So she has to weigh a lot of things in making this decision.  Like a CEO’s vetting process choosing his or her officers.  Because it’s for the long haul.  She’ll work 7 days a week.  And must be available at all times of the day.  Even if she is sick.  Like a CEO.  Only NOT with pay commensurate with her responsibilities.  Unlike a CEO.  And those responsibilities include raising her children.  And managing the household.  While her husband works.  Old school.  Like Paula Cole says.  “I will raise the children if you pay all the bills” (Where have all the Cowboys Gone).

A CEO has a chief financial officer (CFO) to manage the finances.  Mom just wear another hat.  And manages the finances, too.  The husband works.  But he gives his wife the paycheck.  For although his earnings pay the bills, she writes the checks.  And balances the budget.  Which often take a little finesse.  Because there isn’t a lot of money in the beginning.  And raising children and owning a house can be very expensive.  So managing cash-flow becomes a fast learned skill.  Because groceries, school supplies, clothes, utilities, insurance, mortgage and taxes don’t all come due in pay periods equal to the amount of the paycheck.  Which means she has to put a little aside each pay period (like a sinking fund in corporate America) to pay the big things that come due at various times throughout the year.  Or tap her line of credit (i.e., credit card), making cuts in the monthly budget to service the new debt and pay down the high-interest loan as quickly as possible.  Oh, and she cooks and cleans, too.

“Are you wearing Clean Underwear?”

Some may belittle the classical housework of being a mom.  The cooking and cleaning.  But when raising children they can be the most important of her responsibilities.  Of all the animal kingdom, human offspring are the most helpless.  And they’re helpless for the longest time.  It takes 18 years before they leave the nest.  And they’re growing that whole time.  Fueling that growth with three meals a day.  Two if they buy lunch at school during the school year.  This is something a CEO doesn’t have to worry about with employees.  Being accountable for everything they eat or drink.  And not getting them sick in the process for food preparation is a dangerous business.  Especially when working with raw chicken.  So she’s health inspector.  And dietician.  Managing their growth with the family doctor.  Making sure they eat their vegetables.  Drink their milk.  Because it all matters.  To make sure their bones are strong and healthy.  And to have strong immune systems.  For the old maxim is true.  We are what we eat.  Which is a challenge for a mother.  Because kids don’t like eating healthy.  Or being clean, for that matter.

Yes, it’s true.  Mothers want their kids to wear clean underwear. But it’s not just to save them the embarrassment should their child be in an accident where someone may see his or her dirty underwear.  (Well, maybe a little.)  It’s because poor hygiene kills.  And there are few things more unhygienic than pooping.  These are some nasty germs.  They cause outbreaks of cholera when they contaminate drinking water supplies.  And cause E. coli food poisoning when transferred to our food supply (that’s why there are signs in restaurant bathrooms saying that all employees must wash their hands so they don’t kill anyone with their food).  Nasty stuff.  So mothers are fanatical about bathing their kids.  Making sure they wash their hands after using the bathroom.  And that they wear clean underwear.  Also not to pick up food that fell on the floor (that 5-second rule is a dad rule).  Or put things in their mouths that they shouldn’t.  And they’ll keep all their cleaning and plumbing supplies locked up and out of reach of their children.  Their medicines, too.  Because kids like to put things in their mouths.  And will eat or drink anything they find that isn’t a vegetable on a plate.

As protective as she may be, her child will most probably get sick.  Some other kid may sneeze in her child’s face.  Or some other kid may not wash his or her hands after using the bathroom.  Or use a door knob when they have a cold.  Or pass the measles to her child.  Then mother becomes nurse.  Carefully administering medicines.  Emptying barf buckets.  Cleaning her child and the bedding when he or she misses the barf bucket.  All the while cooking and cleaning.  And managing the household. 

Leading by Example

And the responsibilities never end.  There’re good manners to teach.  Honesty.  Morality.  Good behavior.  Inside the home.  And when out of the home.  The mother instructs constantly.  And sets a good example.  Dad, too.  When the kids are around they’ll watch their language.  Because they don’t want their kids to have potty mouths.  And Mom and Dad will treat each other with respect.  Because they want their children to grow up as ladies and gentlemen.  For boys to treat girls with respect.  Not to hit them.  Or objectify them.  And no matter what Mom may have done on spring break when she was in school, she will not do anything now that will set a bad example for her daughter.  Or give ideas to her son.  Like getting girls drunk so they make bad decisions is okay.

This is something moms share with CEOs.  Leading by example.  Because perception in the corporate world can make or break a company.  That’s why they have zero-tolerance policies for bad behavior.  Because a reputation of bad behavior (racist, sexist, hate speech, etc.) will give a corporation bad press that can take years to overcome.  Especially if it’s a high-level manager.  Or an officer.  In fact, it’s worse at that level because of the vetting process.  Like choosing a husband, these people are chosen for the long haul.  And bad behavior in these people reflects poorly on the CEO.  Because he or she chose them.   If your CFO is arrested for tax fraud it shows that you are a poor judge of character.  And have a poor handle on your business operations.  And if you’re CFO is committing tax fraud under your nose, you probably are doing a poor job.  And no doubt the board of directors will be looking for a new CEO.  As one of the best ways to get over a scandal is by cleaning house.

Being a CEO is hard.  So is being a mom.  There’s a lot of on the job training.  Which is more of just figuring things out as you go along.  You learn from your mistakes.  All the while being overworked.  And underpaid.  Working horrible hours.  With little sleep.  On call 24/7.  With no breaks or vacations.  Yes, there may be family vacations.  But Mom will still be working on those vacations.  Same responsibilities.  Just a different setting.  At least the CEO has a staff to handle things while on vacation.  At best a mom gets a quiet bubble bath while the kids are at school.  Or a quiet moment on the toilet.  Safe behind a closed door.  For a few quiet minutes. 

Moms and CEOs have their differences.  But their responsibilities are the same.  A corporation’s success depends on the good decisions of its CEO.  Just as the success of a family depends on the good decisions of Mom.

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