Fringe benefits are anything outside of compensation that a company gives an employee. Some can be universal throughout the company, such as health insurance, and some may only be offered to C-level or select groups of employees, such as club memberships or car allowances. Fringe benefits (more commonly called “Benefits”) have come a long way in the last 100+ years.
Some of the first benefits offered were pension plans for railroad workers in the late 1870s, created as a way to attract workers and incentivize retention as the industrial revolution took over the farming industry, and more and more people did not have a family farm to support them as they aged. Non-wage benefits were slow to catch on to other industries. Most who signed up for the pension plan had to work a minimum of 20 years and be 60 or older to collect the 35% of their earned income. While this plan worked to attract employees, railroad companies paid out very little due to the average life expectancy being 45 years of age for men.
Benefits grew more popular in the 1920s with the establishment of the federal income tax and the exemption of taxes from benefit plans. Today, we see benefits such as unlimited time off, pet-friendly workplaces, employee concierges, gym memberships, and standard health insurance and retirement packages. While a good benefits package can make your company market competitive in helping to attract and retain talent, it can be one of your top expenses beside compensation.
One way to measure the cost of your benefits package is to calculate a ratio of benefits costs to compensation. This is also useful if you have tiered health care plans, where the cost per employee varies widely. If your company is looking to change benefits to be more attractive to potential employees, or you are shopping for a new plan, this ratio helps to establish a benchmark for comparison when shopping around.
To determine your benefit ratio:
- List out all of your benefit costs on an annual basis—this includes life insurance, health insurance, and any supplemental insurances. Add in the company’s contribution cost to a retirement plan, education reimbursement, and the cost of any other benefit offered.
- Do not include items that are considered “perks;” these are extra incentives that do not have a wage-based value attached to them. These can be event tickets or the cost of stocking a break room with snacks or coffee service.
- Once you have your actual benefit costs, ensure they do not include the cost of any deductions from employee pay.
- Next, determine your annual cost for wages, salaries, and employer payroll taxes.
The ratio formula and sample data are shown below. This is the annual cost of all benefits divided by the total cost of wages, salaries, and employer payroll taxes.
Total Annual Benefits Cost
Total Annual Wages, Salaries, and Employer Payroll Taxes
RATIO RESULTS FOR ACME MARKETING COMPANY
Total Annual Benefits Cost $ 405,000.
Total Annual Compensation $ 1,500,000.
Benefits to Compensation Ratio: 27%
According to the US Bureau of Labor Statistics, the average ratio in the US for private industry workers was 29.5% for December 2021. For ACME, there are several factors that could put them slightly under the national average: benefits could be low compared to similar companies, or they may be in a region where the ratio is lower. (The Bureau of Labor Statistics has a very informative website that breaks most of their data down by region, and also provides historical data with commentary; you can find it at BLS.gov)
A few other things to consider: do not include one-time costs such as hiring bonuses or severance if you plan to use the ratio on a regular basis. If you offer an annual bonus, that can be added to compensation if you have done this consistently for the periods you are measuring.
If you are curious about your benefits ratio, ask your CSM how your ratio compares to the national average at your next monthly financial review. If this is an area you have change over time and you would like more insight into your benefits ratio or any other ratio, our CFO Advisory Team can work with you to determine what the optimal plan should be for you to be market competitive and how this ratio fits into a budget or forecast as you plan for the future.