This is a modified post from one I wrote in Nov of 2007. I report this as a part owner of a small business whose costs are increasing every year while revenues are decreasing.
Therefore, I present to you all the new, improved EHR: Effective Hourly Rate.
With the absurdity of bailouts and the apparent transition from a constitutional republic to an elected monarchy, let’s see if the powers that be require us to ‘move from a 20th century economy to a 21st century economy’— by making the change from the worthless concept of ‘wages and tips’ on the W-2 to the concept of ‘total compensation’.
Should I suspect that both parties will be unable, and unwilling, to make such a tiny change in reporting that would benefit the people of the United States with real, you know, information.
The EHR should be given to all employees of all companies. What it will consist of is simple: all of the total compensation divided into what that rate would be on an hourly basis.
Let’s give an example:
Current situation:
Employee paid $18.00 per hour: Employee gets 3 weeks paid vacation
(or 120 hours of ‘paid time off’) and does not miss other days (we will
assume no overtime payments). Assuming that this covers a full 52 weeks
at 40 hours per week that equals 2080 hours in a year.
A bit more math: $18 x 2080 = $37,440.00.
And that is all an employee sees.
Under the EHR: (same employee)
Gross salary: $37,440.00Employer Paid Medicare Taxes: $2321.28Employer Paid Social Security Taxes: $542.88Employer Paid Unemployment: $350Employer Paid Health Insurance for employee (fully paid by employer): $4000
Total Compensation: $44,654.16
Divided by the 1960 hours worked during the year (2080 – (3 x 40 hours paid vacation))
Effect Hourly Rate (EHR)= $22.78
In other words: the EFFECTIVE HOURLY RATE IS ACTUALLY 26% GREATER than what appears to the employee.
Why is this so important? Because most
people—including employers—have little idea of how much money is spent
on health care benefits (or other benefits and additional employer
taxes, for that matter).
Question: Do employees not currently
‘pay’ for their health insurance, even when it is ‘covered’ by the
employer? Answer—of course they do; they pay in lower wages.
The EHR gives employers the ability to
accurately let employees know what their ‘cost’ is—of course, if their
‘value’ was not at least equal to that cost, the employer would likely
not keep them employed. If employees do not feel that they are
receiving an EHR equal to (or greater than) their value, they will
likely consider other options for employment.
With the Effective Hourly Rate,
prospective employees can better assess the value of a job in the
marketplace across employers, trades, professions, and location.
Until we bring these numbers ‘out of the
shadows’, we are doing ourselves, employers, employees, our economy,
and our health care system a real disservice.
(oh, and by the way, it does not require any new bureaucracy, legislation, or regulation).
Eric,
That’s a very good idea. I’ve been calling for something similar myself for a long time, and more and more employers are starting to provide employees with a statement of total compensation each year.
In your example, I think you have the Social Security and Medicare tax amounts reversed. The employer’s share of Social Security taxes is 6.2% of wages up to $106,800 for 2009 and 1.45% of wages with no cap. Other benefits for which the employer pays cash such as a 401-K matching contribution, disability and life insurance, tuition reimbursement and the actuarial value of a year of accrued service toward a defined benefit pension should also be included.
Why aren’t you factoring in the cost of the chair they sit on, that is provided so generously for free? The marginal cost of air conditioning because of the body heat they generate through their very presence? The office space needed to house them? The electrical costs of their computer? The computer itself? The employee refrigerator?
You aren’t factoring those in because “wages” aren’t the cost of an employee to the employer. Wages are what the employee takes home in his hand. They’re what the employee lives on.
Not to mention, it’s perverse to count the cost of health insurance without offsetting it with the tax deduction. And it’s ridiculous to factor in the cost of Medicare & social security without putting in an offset for the cost of retiree health insurance and retirement income for that employee that you’re no longer on the hook for.
Wages are wages. Costs are costs. Don’t confuse the two, please. This is just another sneaky way of paying people dirt and sneaking off with the profits.
If you can’t afford it, your business is failing. It’s not that your employees are lazy, stupid or greedy. Stop blaming us for the fact the whole thing doesn’t work.
Innovate, instead, is my suggestion.
Absolutely nothing new here – sorry to tell you this. This is accounting 101m and has been so for decades: In looking at operating costs on a gross basis, one would look at personnel costs and non-personnel costs.
I’m not quite sure what the remark about the “monarchy” refers to: whether it’s the dictatorship of the Bush administration, abrogating and ignoring laws at will, or a snide remark about the election of a very population gentleman.
If your business’ revenue is declining – that’s your problem. The cost of an employee is not your problem. Go sell more stuff. If you can’t – then you’re business is a failure and it should be closed down. That, ultimately, is the responsibility of the owners.
Squares are rectangles. Wages are costs.
Big companies usually have a good enough cost accounting system to deal with office equipment and utilities per headcount, usually by an allocation through square feet of building space. Small companies might not (but they should).
The comments I made last time this topic came up are still appropriate. The upshot is that what Eric wants to see is widely done already and has been for decades.
t
Buried in your post Eric is the depth of misunderstanding and misperception that exists between employers and physicians with regard to health care, health benefits, and the roles each play in what we have, and expectations regarding changes each needs to make to achieve any kind of significant improvement.