Explains the difference between total salary and employee standard (direct/indirect) cost. Refer to this topic for entering these figures manually or for editing compensation details.
Total Compensation
The total compensation as highlighted above is the total amount actually paid to the employee, normally including:
- Regular hourly or annual pay
- Overtime payments
- Bonus, commissions or incentive payments
- Company contributions towards employee benefits such as 401K match or living allowances paid to the employee.
Total compensation does not normally include direct company paid benefits such as health-care or dental. It is up to your company to decide which compensation elements contribute to total compensation based on each compensation type. Work with your iBE Support Consultant to modify this list.
Direct vs. Indirect Standard Cost
The (total) standard cost is the hourly, daily or weekly cost to apply to projects this employee is working on, for the purposes of project profitability analysis. Standard cost is also used by adding a target profitability margin to determine the optimal billing rate to charge your customers for this employee. Standard cost normally includes all the elements making up total compensation plus company paid benefits and overheads such as:
- Recruitment agency fees *
- Relocation fees
- Travel or visa fees
- Office rental, internet and utilities (split by employee) *
- Equipment (laptop, mobile phone) expenses
- Benefits paid directly by the company such as pension, health, dental and life insurances
- Employer paid taxes such as employer contributions to social security and workers compensation
- Financing charges such as banking fees and the cost of money from when the employee is paid until the anticipated time when the company is reimbursed for that employee's work from your customers *
The direct standard cost is normally just the sum of direct costs incurred by the company on behalf of this employee. Direct standard costs are costs which can be accurately attributed to this one employee vs. indirect costs which are normally for a group of employees (such as office rentals) and estimated or allocated out based on the number of employees in the group. It is up to you to define which compensation elements form direct vs. total (indirect + direct) standard costs working with your iBE Support Consultant, in how you set up compensation codes and types.
Example
Fred Jones earns a salary of $60,000 per year or $5,000 per calendar month (pay period). Fred also gets paid overtime at 1.5x his hourly rate, paid time-off and a bonus which is around 10% of his annual salary, based on company performance. The company paid a 30% of salary recruitment fee, with an average retention/period of five years, and $1,200 in relocation expenses. Social security and other employer paid taxes and benefits add up to 15% of Fred's compensation. Office and equipment rental comes to approximately 20% of direct standard cost plus an admin. overhead of 10%. In this example:
- Total compensation would normally be $5,000 plus $500 (estimated bonus) = $5,500 per month or $66,000 per year. Overtime is not included because we do not know in advance how much overtime Fred will work. Even the bonus component of his total compensation is an estimate. Paid time off is part of his compensation on a monthly basis
- Fred's direct standard cost is his total compensation plus recruitment fees ($20,000 / five years = $333.33 / month) and relocation fees ($20 / month excluding interest, plus taxes of 15% of total compensation ($825 / month). Fred's direct standard cost is therefore $6,678.33 / month or $80,139.96 / year
- Fred's total standard cost is his direct standard cost plus 20% + 10% = $8,681.83 / month or $104,182 / year.
By choosing which compensation elements contribute to total compensation, direct and total standard cost you can quickly and accurately calculate an employee's cost to the company. Based on their billing rate and billable utilization you can determine each employee's profitability.