Labour Costs and Remuneration Methods

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Introduction to Labour Costs

This chapter looks at how remuneration is calculated and accounted for.

Remuneration methods

Labour costs can arise from:

• Basic wage or salary
• Overtime premiums
• Bonuses
• Holiday pay
• Sick Pay
• Payroll taxes

Many countries pay wages and salaries under a ‘pay as you earn scheme’ which means that the employer deducts the employees’ income tax from the gross wage and pays that over directly to the tax authority. Only the net amount after tax is then paid to the employee.

Employee remuneration can be based on the following approaches:

1) A constant weekly or monthly amount

This is easy to calculate:

Labour cost = remuneration per period x number of periods

2) An amount based on hours worked (basis plus overtime)

3) An amount based on units produced: piecework

Often there is a guaranteed minimum amount of pay so as to comply with minimum wage rate legislation.

4) An amount based on productivity

There are many different types of bonus scheme and any question would have to set out the precise rules.

5) An initial amount plus a bonus

Here, for example, the bonus could be part of a profit share. Full instructions would have to be supplied as to how to calculate the amounts.

Example 1

Employees are paid $6/hour for a standard 40 hour week. Overtime is paid at time and one third.

The employee is expected to make at least 80 units in a week, and to encourage productivity, each unit in excess of 80 will be generate an additional payment of $5 less any overtime premium that would relate to the time the additional unit would normally take.

What is an employee’s wages in a week in which 90 units are made and the employee works 44 hours?

Answer to Example

Note: each unit is expected to take 40/80 = 0.5 hours

The effect of changes in remuneration methods and changes in productivity on unit labour costs

To increase competitiveness, employers will try to reduce unit costs and will often attempt to do this by offering employees productivity payments. Employers need to look at the before and after costs.