Compensation of employees

Compensation of employees (CE) is a statistical term used in national accounts, balance of payments statistics and sometimes in corporate accounts as well. It refers basically to the total gross (pre-tax) wages paid by employers to employees for work done in an accounting period, such as a quarter or a year.

However, in reality, the aggregate includes more than just gross wages, at least in national accounts and balance of payments statistics. The reason is that in these accounts, CE is defined as "the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period". It represents effectively a total labour cost to an employer, paid from the gross revenues or the capital of an enterprise.

Compensation of employees is accounted for on an accrual basis; i.e., it is measured by the value of the remuneration in cash or in kind which an employee becomes entitled to receive from an employer in respect of work done, during the relevant accounting period - whether paid in advance, simultaneously, or in arrears of the work itself. This contrasts with other inputs to production, which are to be valued at the point when they are actually used.

For statistical purposes, the relationship of employer to employee exists, when there is an agreement, formal or informal, between an enterprise and a person, normally entered into voluntarily by both parties, whereby the person works for the enterprise, in return for remuneration in cash or in kind. The remuneration is normally based on either the time spent at work, or some other objective indicator of the amount of work done.

For social accounting purposes, CE is considered as a component of the value of net output or value added (as factor income). The aim is not to measure income actually received by workers, but the value which labour contributes to net output along with other factors of production. The underlying idea is that the value of net output equals the factor incomes that it generates. For this reason, some types of remuneration received by employees are either included or excluded, because they are regarded as either related or unrelated to production or to the value of new output.

In different countries, what is actually included and excluded in CE may differ somewhat. The reason is that the way in which workers are compensated for their labour may be somewhat different in different types of economies. For example, in some countries workers get substantial payments "in kind", in others they don't. Systems of social insurance also differ between countries, and some countries have little social insurance. One has to keep this in mind when comparing CE magnitudes for different countries.

A compensation system has to be aligned to the mission, vision, business strategy and organizational structure of a company to design the compensation plan in an efficient way to can achieve the goals. A general compensation plan consists of three components: a base compensation, rewarding incentives, and indirect compensation in form of benefits.

Inclusions in the statistical concept

In UNSNA these items are conceptually included in the statistical aggregate:

• Gross wages and salaries earned by employees and payable in cash.
• cash allowances, overtime pay, bonuses, commissions, tips, and gratuities if paid by the employer to the employee.
• Remuneration in kind paid by the employer to the employee valued at purchaser's prices, including meals and drinks, personal accommodation, uniforms worn outside of the workplace, vehicles or other durables provided for the personal use of employees, free personal travel, free personal fuel, recreational facilities, transport and parking subsidies, and creches for the children of employees.
• Real or imputed social contributions and income taxes to government payable by the employee in respect of employment.
• The value of the social contributions in respect of labor hired, which are paid by employers - these may be actual social contributions payable by employers to social security schemes or to private funded social insurance schemes for employees; or imputed social contributions by employers providing unfunded social benefits.
• income of students from paid work, including the value they contribute through work for an educational institution.
• income received by shareholders who are also employees of the corporation, and who receive paid remuneration (e.g. stock options) other than dividends.
• income by outworkers who are paid by an enterprise for work done.
• the value of the interest foregone by employers when they provide loans to employees at reduced, or even zero rates of interest for purposes of buying houses, furniture or other goods or services.

Exclusions from the statistical concept

In UNSNA these items are conceptually excluded from the statistical aggregate:

• the value of unpaid voluntary work.
• income from self-employment (often included in operating surplus or gross profit).
• income of the unemployed.
• income of those not in the labor force.
• the value of work by unpaid family workers.
• property income as contrasted with labour income.
• taxes payable by the employer to the government in respect of the total gross salary bill.
• income of outworkers which consists of entitlements to products or profits of an enterprise. When the outworker is an own-account worker, the payment from the enterprise to the outworker is treated as a purchase of intermediate goods or services (however, self-employed income is not always treated in the same way by different countries).
• social benefits paid by government to employees (not directly related to the work they do).
• expenditures made by employees in order to enable them to take up their jobs or to carry out their work, including reimbursement of travel, removal or related expenses made by employees when they take up new jobs or are required by their employers to move elsewhere.
• expenditures by employees on tools, equipment, special clothing or other items that are needed exclusively, or primarily, to enable them to carry out their work (usually regarded as Intermediate consumption).
• employee social benefits paid by employers in the form of children's, spouse's, family, education or other allowances in respect of dependents.
• Payments made at full, or reduced, wage or salary rates to workers absent from work, because of illness, accidental injury, maternity leave, etc.

Criticism

The main criticisms made of the accounting concept of CE are that it can make workers' incomes look larger than they truly are, and that the main components of CE are not separately itemised in the accounts. What CE really contains is not made explicit.

Often economists confuse CE with the total wage bill of a country, which is false. They might use CE to strike a quick "wages-profits ratio" or calculate unit labor costs, without realising what they are really doing. CE is not equal to gross wages, or real disposable income of workers, nor - strictly speaking - total labour costs.

When national accounts were originally designed, social insurance contributions were not so large, but as they have become large since that time, it is argued they ought to be separately itemised.

At the very least, it is argued, a distinction must be drawn in the accounts between income actually received by workers, and deferred income (such as social insurance payments), and all imputations should be made explicit. In some countries, this is in fact done to some extent in national accounts, but in others, it isn't. One reason for that is that it may actually be very difficult to estimate accurately all the different types of remuneration workers receive. UNSNA does provide for accounts of social spending by governments, but it is much more difficult to identify what different groups of transactors contribute and receive from governments.

A subsidiary criticism is, that the accounting concept of CE is biased towards employers - it makes it look like as though employees do not have all sorts of costs of their own with respect to their work, whereas in reality they do.

For example, research showed the costs associated with turning up for work each day reduce the average annual wage among British workers by £2,300; The official average salary falls from £22,248 to £19,970 when the typical costs associated with having a job - such as transport, snacks and clothes - have been deducted. A poll by YouGov, sponsored by debit card group Maestro, showed workers typically spent £120 extra a month on food, £50 on travel and £35 on work clothes. The research found that the average worker spent 16 days a year getting ready for and travelling to work. (source: The Guardian, 28 November 2005)

Also, if governments pay subsidies to producing enterprises, these are in UNSNA deducted from indirect taxes they pay, but no similar accounting theory is applied to workers in the valuation of net output.

The reply to that, is that the aim is to cover the true total labour costs to employing enterprises, which represent the contribution by labour hired to net output or GDP. However, this is not strictly true, since employees may themselves be legally required to pay social insurance and tax contributions, and these contributions are nevertheless included in CE.

In the product account, self-employed income is either allocated to CE, intermediate consumption or to operating surplus, but not separately itemised, although in some countries national accounts will separately itemise this item. More often, self-employed income is itemised in the income & outlay accounts.

In Marxian economics, additional criticisms are made, namely that

• the CE aggregate does not separately itemise the earnings of higher corporate officers and managers, and it does not distinguish between different categories of employees.
• income by higher managers and executives in the form of profit-sharing or stock options should be included in gross profit.
• no adequate distinction is made in the production account between paid productive and unproductive labour according to economic function; at best, earnings in different output-defined economic sectors are distinguished.
• the CE concept contains class biases rather than making the incomes of different social classes explicit.
• Labour is viewed as only one factor of production, rather than as the agent which creates, transfers and conserves all economic value.

The effect, Marxian economists argue, is that the way incomes are really shared out in society is hidden rather than made explicit, and this problem is not overcome in supplementary income & outlay accounts. Very substantial reaggregation is required to obtain better measures of labor-remuneration in the real world. Thus, the overall effect is that the real rate of exploitation of labour is also obscured.

In Feminist theory, the omission of the value of housework and women's unpaid voluntary labour in the accounts is also criticized. Time use surveys reveal that paid labour is in reality dependent on a lot of unpaid voluntary labour, without which market economies could not function at all.

See also

• Wages
• National accounts
• Gross Output
• Intermediate consumption
• Labor power
• Value added
• Value product
• Productivity
• United Nations System of National Accounts (UNSNA)
• NIPA
• Productive and unproductive labour
• Unproductive labour in economic theory
• Abstract labour and concrete labour
• Wage share

References

• 1993 UNSNA standard [1]
• "Compensation of Employees in Balance of Payments Statistics" [2]
• OECD sources and definitions for labor compensation [3]
• Bert Theeuwes, Compensations & Benefits in Belgium [4]
• Edgar Z. Palmer, The meaning and measurement of the national income, and of other social accounting aggregates.
• M. Yanovsky, Anatomy of Social Accounting Systems.
• Anwar Shaikh & Ahmet Ertugrul Tonak, Measuring the Wealth of Nations. CUP.
• Paul Studenski, The Income of Nations; Theory, Measurement, and Analysis: Past and Present. New York: New York University Press, 1958.
• Zoltan Kenessey (Ed.), The Accounts of Nations, Amsterdam IOS, 1994.

External links

• Google - public data: GDP and Personal Income of the U.S. (annual): Compensation of Employees
• Compensation & Benefits Survey 2010