Last Saturday night, my wife and I found ourselves in Betheria, SC, deep in the Carolina low country, about an hour northwest of Charleston, in a converted shed next to railroad tracks at the end of a dirt road.
We weren’t vacationing in Howe’s Bayou.
We were there as part of a once-a-week audience of50- 60 people aged 40-80 to listen to an all-star cast of local bluegrass, gospel, and C & W music makers (same age) at”Guy and Tina’s Bluegrass Pickin’ Parlor.” We brought some dinner with us for mutual sharing, admission was free. The entertainers were unpaid, irrespective of their talent-which was considerable-on the banjo, guitar, mandolin, bass, or fiddle.
As the hours there slid by, I got to thinking…
Five weekends earlier, Annie and I had sat among72,000people in Houston’s Reliant Stadium, ostensibly to watch the Texas Rodeo, which turned out to be only the warm-up act for America’s latest teeny-bopper sensation, 17-year-old Hillary Duff. Amid a sea of pre-teens and early teenagers and their moms (mostly), it seemed that we were the only people over 40 in the arena. Tickets were $20and up; the sell-out grossed well over $1million. The talent was difficult for us to discern, but the staging was phenomenal.
Who was producing greater value? Who had greater talent? Which audience was more discerning? And what real difference did it make?
I thought of this some more this week as I started reading Thomas Friedman’s latest book, The World Is Flat , subtitled A Brief History of the Twenty-First Century. Friedman’s thesis, as regular readers of the N.Y.Times know, is that “software… in conjunction with the creation of a global fiber-optic network… has made us all next- door neighbors.” What Friedman calls Globalization 3.0 is”flattening and shrinking the world,” driven not by countries or companies, but by individuals -“non-Western, non-white individuals from every corner of the flat world… who are now able to plug and play. ”
Citing an essay in the journal Accounting Today (June7, 2004) by L. Gary Boomer, CPA, Friedman writes ” There are about seventy thousand accounting grads in India each year [according to Boomer], many of whom go to work for local Indian firms starting at $100 a month. With the help of high-speed communications, stringent training, and standardized forms these young Indians can fairly rapidly be converted into basic Western accountants at a fraction of the cost, ” using high-speed data links to firms like Boomer’s.
One hundred dollars a month. Even with a 4x mark-up for the firm, that’s only $5,000/yr., sourced to the U.S. – whether it’s for an accountant, a financial analyst, a software developer, a market researcher, or a publishing editor, all of which can be provided by the thousands in India today, and in China, Singapore, South Africa, and Eastern Europe tomorrow.
Compare that with the full-cost job analysis that we did last month for a client with a rather generous benefits package, and with work requirements that might be considered globally available:
| Salary | $50,000 |
| FICA at 7.65% | 3,825 |
| SUTA/FUTA at 3.2% on first $14K | 448 |
| 50% of medical insurance (single) at$212/month | 2,544 |
| 401K match (25%) | 1,250 |
| Worker’s compensation at .9% | 450 |
| Total cost to the company | $58,517 |
In return for this, I said to my client, you get 40hours a week for 52 weeks as a starting point –
| 2,080hours/ year |
However, from this gets deducted:
| 12 paid holidays x 8hours- 96 | |
| 10 days of paid vacation | -80 |
| 5 summer Fridays (half staff is off each Friday)-40 | |
| 3 sick days (on average) | -24 |
| 1 birthday | -8 |
| Net hours available to work | 1,832hrs./ |
| Days available out of 260 (52 x 5) | 229 days |
A 25% allowance for personal time (bathroom, coffee, water, etc) plus lunch time, social interaction, and miscellaneous life distractions reduces work time by 458hours, to 1,374 hours per year against a 40- hour week. The $50,000/year employee thus ends up costing my client over $42/hour.
How does that stack up against an Indian subcontractor charged at $5,000 a year? If this well- educated, middle class, ambitious accountant/financial analyst/software developer/etc. produces 2,000 hours of competitive, billable product, his/her $2.50/hr. trumps $42/hr. at the end of every communications link.
Professional service providers, in particular, and their employees have to understand this full-cost equation. For all employers, an individualized employee cost analysis(as above) distributed once a year with paychecks may provide the employee with useful perspective about his/her role in achieving the company’s economic model.
What does all of this have to do with Guy and Tina’s Pickin’Parlor and Hillary Duff? Simply this: in the entertainment world, the best steak is often less expensive than the sizzle, and we acknowledge that the Hillary Duffs and Barry Bondses of the world are overpriced. But what happens when our employees’ sizzle begins to fizzle in the face of low- priced offshore talent? Hopefully Friedman has the answer in the 330 pages that I have yet to read.
Alligator Bites
Managers often seem puzzled by the fact that their payroll tax expense tends to be higher in the early months of the calendar year – for two primary reasons:
- The 7.65% FICA tax drops to 1.45% at the point at which individual year-to-date earnings exceed $91,000 (for 2005), and
- SUTA (State Unemployment Tax Administration) taxes are payable only on the first$14,000 of calendar year earnings, at a rate between0.6% and 9.3%, depending on how much a company’s unemployment reserve pool has been drawn down by its terminated employees in recent years.
BEWARE: Because your timely payment of SUTA taxes results in a 5.4% credit against your 6.2% FUTA (Federal Unemployment Tax Administration) tax liability, your net FUTA payment is only .8% on the first $7,000 of wages, a mere $56per person. But if you failed to pay 2004’s SUTA in full by 1/31/05, the credit is revoked and you are liable for the full 6.2% tax, $434 for every person in your employ.
On an affordable retainer basis, FM serves as the part-time controller and senior financial manager for multiple clients, leading them to profitability and positivecash flow.
The goal is for the organization to outgrow Financial Manager’s services, at which time FM will take the lead in identifying and hiring the right full-time financial person for the firm, and effect a smooth transition to his or her management.
Draining the Swamp
Graham Briggs, my former partner, founder of Financial Managers and successful consulting CFO, offers the following as a typical benefits package for a full-time CFO on salary:
| Company share of FICA/Med | 5.20 | % |
| Vacation, 3 weeks out of 52 | 5.77 | |
| Holidays, 10 days | 3.85 | |
| Sick, 3 days | 1.15 | |
| Health insurance @ $600/month | 4.80 | |
| Disability insurance @ $150/month | 1.20 | |
| Life insurance @ $75/month | 0.60 | |
| Bonus | 10.00 | |
| Equity participation | 5.00 | |
| 401K match, at least… | 2.00 | |
| Total benefits package | 39.57 | % |
If the base salary is $150,000 , as it might well be for an experienced CFO in a small-to-medium- sized firm, then the benefits package on this basis can approach $60,000. Less expensive alternatives may be available…