Total Compensation: Money Isn't Everything

In the final installment of our three-part series ...

On Labor Day last year, Andy Wright and his five employees all took the day off. Wright was the only one who didn't enjoy a free holiday.

“Labor Day cost me $1,400,” says Wright, the owner of WrightBuilt in Grass Valley, Calif. “I bled that cost, but I don't think any of [my employees] thought about that.”

Wright, who provides his employees a tool allowance, paid time off, and a 401(k) plan with matching funds, says he has struggled to effectively communicate the value of these benefits to his crew.

“In construction, everyone is really fixated on that dollar amount,” Wright says. “What I say is: ‘You're fixated on $55,000 a year; but you're getting $1,100 in vacation, you're getting a vehicle allowance, a retirement plan — your package is really worth $62,000 per year. Some of it is deferred, like the 401(k); some of it is when you're home with your family on the Fourth of July.'

“All they say, is: ‘Yeah, but what's my hourly rate?' They are single-mindedly focused on the hourly rate.”

Wright's problems are not uncommon. Remodelers tend to have trouble getting employees to look beyond their paychecks and see the value in anything other than a higher wage. The challenge for remodelers lies in understanding and convincing their employees of the dual nature of benefits — that while they are less tangible than cash, benefits have a real dollar value.

The way most employers think about benefits, no matter what their business, is as one component of what's referred to as total compensation. Total compensation encompasses any regular expense incurred on behalf of your employees. Judith Miller, a long-time consultant to remodelers, organizes employee-related expenses into four categories:

• Wages. The base hourly rate.
• Required expenses, which include liability and workers' compensation insurance, state and federal unemployment taxes, plus FICA and Medicare.
• Discretionary expenses, which include health, dental, and life insurance, bonuses, contributions to retirement plans, and paid time off.
• Indirect allocations, which include cell phones, tools, tool repair, tool allowances, as well as company vehicles, vehicle allowances, and gas allowances.

• Nationally, a construction worker's wages account for only two-thirds of his total compensation, according to the Bureau of Labor Statistics. Among remodelers, however, the proportions vary significantly. Some find that their most expensive employees cost more than twice their wages once health insurance, retirement, and costly workers' comp and liability insurances are factored in.

  “A carpenter who makes $25 dollars an hour, by the time you load his rates, could cost $62 an hour,” says Bob Tilghman, owner of Tilghman Remodeling in Hatboro, Pa.

Tilghman's example is extreme, a worst-case scenario in which his most expensive carpenter maxes out available benefits contributions. Still, it's instructive in that it highlights the real cost of benefits and the degree to which the other components of total compensation might limit wages.

“Any kind of benefit has an effect on the total burden,” says Bjorn Freudenthal, general manager of College City Construction in Lakeville, Minn. “Whatever level of benefits you want to offer, after that decision is made, all the operations bear that burden.”

The key for remodelers is making employees understand that while benefits might limit wages, they have their own real value. And the best way to do that is to create total compensation worksheets for each of your employees. A total compensation sheet lays out each employee-related expense as both an hourly and a yearly cost, allowing for regular cost assessments as well as better estimating and budgeting. At the same time, the sheet can help provide employees with a more realistic picture of the value of employment, an effort that can improve retention and morale.

At Old House Restoration in Alma, Maine, owner Les Fossel says wages are often significantly lower than those of his competitors because they don't offer benefits or comply with insurance regulations. Fossel says that using a total compensation sheet has helped him explain to new hires how, even with lower wages, their total compensation packages are actually worth more than what they were earning before.

Paul Winans, co-owner of Winans Construction in Oakland, Calif., also finds total compensation sheets useful in helping employees understand the value of their compensation packages. “The [total compensation] sheet lays out, in addition to compensation, exactly what we provide each employee and how much it costs,” Winans says. “It helps people to understand exactly what they're getting for each hour they work each year. It's remarkable how effective it is.”

Freudenthal feels the same way. “Every year during review time, we review total compensation — salary hourly, earnings potential, medical, dental, trucks — so the employee has a real understanding of what he's getting.

“What you look at is total packages: Total compensation is a lot of different factors. The important part is how any one [factor] affects the total,” Freudenthal says.

There are a number of ways to arrange a total compensation sheet. (To see examples, go to www.remodelingmagazine.com, click on “TheMagazine” and select “Current Issue,” then “WebXtra.”)

As with any spreadsheet, you want it to be logically organized and to present the data clearly. The idea is to determine how much the company spends on each employee, both annually and per hour. The first step is to organize the components of total compensation, then calculate an annual total for each employee.

Some costs — health insurance premiums, for example — are easy to assess. A monthly premium simply has to be multiplied by 12 to produce an annual total. Taxes and insurance costs that are assessed as a percentage of annual wages can be calculated easily, too. Just multiply the appropriate percentage by total annual wages. For example, if the workers' comp rate is 7.5% and the carpenter's annual wage is $37,440, then the annual cost of workers' comp for this employee is $37,440 x .0765 = $2,864.16.

Benefits such as uniforms, vehicle and gas allowances, and tools require a bit more work, because these costs might not be easy to determine accurately. For example, says Shawn McCadden, a remodeling consultant, educator, and REMODELING columnist, if you have a truck that's assigned to one employee only, the calculation is straightforward. But if two or more employees use the truck, you have to make sure you assign the appropriate percentage of the total annual maintenance cost to each of those employees.

Employee education will also need to be assessed to determine how to assign costs to an individual employee. Paul and Nina Winans give their employees a $200 education allowance each year. From year to year, additional costs have to be factored in as well. Last year, a Sandler sales trainer ran five training sessions with Winans' sales team.

“I took the charges for those five sessions and divided that by the number of people attending, then applied that number to each employee,” Nina says.

The next set of calculations determines how much each employee-related expense costs the company per hour. Before taking this step, it's essential to understand the difference between productive and nonproductive hours. Although there are 2,080 hours each year (40 hours per week multiplied by 52 weeks), none of your employees actually works all of those hours.

“There are 2,080 hours in the year,” says Paul Winans, “but we back off things like the vacation days, holidays, the time they're not producing.”

Nonproductive time — time in which employees are getting paid but not producing revenue for the company — can include any paid time off (vacation, holidays, sick or personal days), meetings, time spent on training and education, and miscellaneous lost time.

Bob Tilghman, the Pennsylvania remodeler, doesn't include meetings in his total compensation sheet, but deducts an estimated number of hours lost to inevitable lapses in productivity.

“It's human nature,” Tilghman says. “People have conversations, the coffee break runs over, there's time wrapping up cords at the end of the day. For the lead carpenters, we double that because they spend a lot of time meeting with subs to go over their work and meeting with homeowners.”

Whatever it amounts to, nonproductive time is essential to understanding the true cost of labor.

“The difference between their productive hours and what you pay them for the whole year is important,” McCadden says. “The cost you're assuming per productive hour has to be inflated to account for those non-productive hours. During the hours when they're being productive for the company, you still have to bring in enough to be able to pay them for the hours where they're not being productive for the company.

“If you use only the number of productive hours to price your jobs, you're not going to bring in the revenue to pay for those other hours,” McCadden says.

To find the true cost of labor, then, you have to calculate how much it costs during an employee's productive hours to pay that employee for the whole 2,080-hour year.

First, subtract each employee's total number of nonproductive hours in a year from the total of paid hours in a year. You can include all holidays, vacation days, sick days, hours spent in training or education, regularly scheduled meetings, and an estimated total of miscellaneous lost time.

For example, if a carpenter takes six paid holidays for a total of 48 hours; uses 15 paid vacation days for a total of 120 hours; spends about 50 hours a year in regularly scheduled meetings; and spends 32 hours in company-sponsored education programs, that totals 250 paid hours in the year that he spent off the jobsite, and thus not producing revenue for the company.

Knowing that the carpenter worked just 1,830 productive hours, the annual cost of each component of his total compensation can be calculated as a cost per hour worked. “Workers' comp, health insurance ... you have to factor in each one as a percentage breakdown of the total compensation, then you break all those items down into an hour's work,” says Russell Caldwell, owner of Caldwell Construction in Springfield, Mo.

To do that, divide each total cost by the total number of productive hours. For example, health insurance premiums for this carpenter cost $1,758.25 annually. So, $1,758.25 ÷ 1,830 = $0.96 per hour. Workers' comp, at 7.5% of wages, is .075 x $37,440 = $2,808 per year ÷ 1,830 = $1.53 per hour.

Totalling all of these costs per hour worked produces a true hard labor cost of $30.09 per hour. Now this number can be applied to the number of nonproductive hours to determine how much the remodeler pays this carpenter for nonproductive time: $30.09 x 250 nonproductive hours = $7,523.11.

“The value of determining costs per hour,” McCadden says, “and understanding how much they get paid versus productive hours, is that the business owner sees the reality of that, but also the employee sees the reality of that. The employee can say, ‘Hey, there are 250 hours a year when they're paying me but I'm not working.'”

WEB EXTRAS: Downloadable worksheets: Fully Loaded Cost for Field Employees , and one for Hard Cost of Labor .

—David Zuckerman is a freelance writer based in New York.