Compensation of employees

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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. Businesses within the same organization will have different competitive conditions, acquire different business strategies, and design compensation strategies. 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[edit source | edit]

The United Nations System of National Accounts (UNSNA) conceptually includes the following items in the statistical aggregate:

Exclusions from the statistical concept[edit source | edit]

UNSNA excludes the following items in the statistical aggregate:

Criticism[edit source | edit]

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 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[edit source | edit]

References[edit source | edit]

External links[edit source | edit]