Mike Hogan
Hiring and managing employees is a new and challenging experience for many Ohio farm managers. As farms continue to become larger and more complex, and farm family demographics change, the need to effectively manage hired employees is likely to increase. How you compensate these employees can help to determine how successful these employees will be, since compensation perceived to be unreasonable by the employee can be an important source of job dissatisfaction. This fact sheet is intended to provide farm managers with information regarding various types of compensation.
There is no precise method of determining exactly how much a particular job is worth to a business. A comparison of what other area employers are paying for similar work is a good way to establish a general salary guideline. Local Chambers of Commerce sometimes collect this type of information in their communities. Asking other farm employers in your area how they compensate employees is another option.
You should also compare how other nonfarm employers in your area are compensating employees for similar jobs, since you will be competing with those employers for the best employees. An Iowa State University study found that off-farm jobs were the largest cause of farm employee departures. Twice as many employees left for off-farm jobs than those who left to work on other farms, or to begin farming on their own. One would expect the same type of scenario in Ohio, where many opportunities for off- farm employment exist.
When collecting compensation information from others, ask about job descriptions, not just job titles, to be sure that you are comparing "apples with apples." Comparing the compensation package of a part-time employee whose primary responsibilities are to feed calves and scrape the barn with a full-time farm manager who is responsible for decision- making on the farm would not provide valuable information.
Webster's dictionary defines wages as the money paid to an employee for work done, and compensation as what one receives for labor. Wages are only a portion of the cost of labor on a farm. Indirect costs, or fringes, are sizeable, usually from 15 to 40 percent of the cash wages or salary. Research conducted on farms in New York found fringes to cost 40 percent of the wages paid. These costs include such things as incentives, bonuses, benefits (health insurance, life insurance, the use of farm assets, etc.), time off, and perquisites such as room and board. Additionally, mandated items such as workers compensation, unemployment insurance and social security taxes will add to the total cost of the compensation package. Let's take a brief look at the various types of compensation.
Wages/salary-- The wage or salary will usually make up the largest portion of the compensation package. Will you pay an hourly wage or a yearly salary? Will the work week consist of 40 hours or 80 hours? When does work time begin and end? How will you handle overtime? These are difficult wage/salary items to decide, especially in a business as variable as farming, but they must be decided upon and understood by the employer and employee at the time of hiring. One note about wages--many farm employers say that they simply can't afford to pay competitive wages, but research from New York dairy farms has shown that farm employers who pay higher wages tend to have higher productivity and higher returns.
Time Off-- Too many farm employers fail to recognize the value of giving employees adequate time off for personal and family activities, vacation, and illness. Paid vacation and sick leave are commonplace in our society. Is there any reason why farm employees shouldn't receive these benefits? Labor-intensive operations such as dairies routinely fail to adequately plan for time off for their employees. In a study of dairy farm employers, Agri Careers, of Massena, Iowa, found that 20 percent of employers had no formal plan for routine time off; 15 percent had no plan for vacation time; 95 percent had no sick leave plan: and 85 percent did not provide any time off for holidays.
Time off is clearly one type of compensation which a farm employer must address if he or she expects to be competitive with other employers and retain valuable employees. Employees and their families have the same economic and social needs as nonfarm employees, and they expect time off for personal and family activities.
Benefits-- There is probably no other form of compensation which varies as much from one employer to the next as does benefits. The value of benefits is sometimes subtle and overlooked, yet benefits are often the reason why valued employees move on to other types of work.
Benefits include items such as health insurance, retirement contributions, life insurance, the use of farm assets, and other items. Since individuals have differing needs and desires, employers should attempt to tailor benefits packages to the specific needs of individual employees as much as possible. Innovative employers will work with individual employees to determine how their needs for certain benefits might best be met as those needs change over a period of time. For example, a young unmarried employee who continues to live at home with parents may not need health insurance, but when the employee marries and starts a family, the need for health insurance as well as life insurance increases. Additionally, providing creative benefits, such as the use of certain farm assets like pasture or shop tools, may provide a valuable benefit to the employee at little or no cost to the employer.
Compensating farm employees with certain benefits can also have potential tax advantages for the employer and the employee since social security taxes are not required to be paid on certain noncash wages. To determine if a certain benefit provides a tax advantage, consult your tax consultant or The Farmers Tax Guide issued yearly by the Internal Revenue Service.
Bonuses-- A bonus is a payment beyond the regular wage or salary, usually paid to reward employees for their contribution to a successful year for the farm business, or to reward length of service. One pitfall with bonuses is that they often become routine practice by employers, and expected by employees. When the bonus becomes expected, or tradition, it in effect becomes regular compensation, and probably does little to reward or reinforce positive or desired behavior by the employee.
Bonuses should depend upon how well the business has performed and how well the individual has performed. It makes little sense to award the highly-productive employee the same size bonus as the average performing employee. This is another reason why bonuses given to all employees at a certain time of the year (like a turkey or a side of beef) do not work.
Incentives-- An incentive plan differs from a bonus in that it is tied to specific measures of performance. Incentive plans can be developed for any type of farm enterprise or type of employee, although they are most often used to reward skilled or managerial employees. Incentives should not be used as a substitute for fair wages/benefits or good labor relations. These items should be satisfied first, then supplemented with incentives. For incentive plans to work, they should motivate employees to excel and reward them monetarily and frequently when they do. Incentive plans should be made as simple as possible and must relate to items over which the employee has control. For example, an incentive plan tied to decreasing the calving interval on a dairy farm would only work for an employee who has control over, or direct input into, the heat- detection, breeding, and nutritional components of the operation.
For ideas about suggested bonuses for specific agricultural enterprises, consult North Central Regional Extension Publication #329, Farm Personnel Management, available through your county Extension office.
Other Compensation-- Farm employers may also wish to compensate farm employees with other noncash items such as housing, utilities, fuel, or farm commodities. These forms of compensation should be clearly defined, preferably in writing, to avoid misunderstandings. Providing housing for an employee should only be considered if both the employer and the employee desire such compensation. Providing an employee with housing simply because the employer owns a vacant home should not be used to reduce the cost of compensation for the employer. Compensation Required by Law--Federal and state laws require that certain fringe benefits be paid by employers. These include workers' compensation, unemployment insurance and social security taxes. An in-depth discussion of these items can be found in Labor Laws and Regulations, Human Resource Management On The Farm Fact Sheet #5, or The Ohio Farm Labor Handbook, available at your county Extension office.
The question of how to compensate family employees routinely arises in the farm business. There are probably very few instances when the compensation concepts presented in this fact sheet should not apply to family employees. It might be useful for farm employers to ask themselves whether or not they would compensate a family employee differently if the employee were not a family member. If the answer is yes, then the employer should reexamine the employee's compensation package.
Because the total costs of compensation are far greater than the wage/salary, farm employers should provide all employees with a wage & benefit statement each year. Such a statement should list the actual cost, or value, of each form of compensation received by the employee. This helps the employee to understand the true worth of his or her compensation package, and is also a worthwhile management tool for the employer.
Once an orderly compensation structure including rewards for superior performance is established, the farm employer should attempt to instill in employees a sense of responsibility for the welfare of the business. To achieve this, employers should consider the following:
1. Delegate meaningful responsibility to employees
2. Include employees in decision-making, consult with them
3. Say "thanks"
4. Find opportunities for employee growth and development.
Remember, farm employees are like anyone else--they desire to develop and advance in their vocation.
Employees: How To Find And Pay Them. Business Development Publication PM2. U.S. Small Business Administration.
Farm Personnel/ Management. 1989. Kenneth H. Thomas & Bernard L. Erven. North Central Regional Extension Publication 329.
Good Men are Hard To Find. Anne Barnes. Farm Futures, March 1992, pg 12. Human Resource Management On The Farm. 1988. Thomas R. Maloney, et. al. AE EXT 8-22. Cornell Cooperative Extension.
What Others are Doing About Giving Time Off. Gary Maas. Hoard's Dairyman, May 10, 1993, pg. 407.
Compensation Packages For Farm Employees. 1992. Raymond E. Massey and Gary Bredensteiner. NebGuide G92- 1067-A. Cooperative Extension, University of Nebraska- Lincoln.
Bernard L. Erven, State Specialist, Dairy Farm Management
David Miller, District Specialist, Farm Management
All educational programs conducted by Ohio State University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, creed, religion, sexual orientation, national origin, gender, age, disability or Vietnam-era veteran status.
Keith L. Smith, Associate Vice President for Ag. Adm. and Director, OSU Extension.
TDD No. 800-589-8292 (Ohio only) or 614-292-1868