Ideas on changing the work payment structure

[VolcanicArts]

I was just thinking that the way we are compensated for work is completely absurd. With the current system you either get paid a set amount per hour or a salary independent of how much profit a company pulls in. Some companies offer bonuses every now and then, but these are taxed at an exorbitant amount and generally are not worth the time invested trying to obtain these. I think it would make more sense to pay people hourly with benefits, and every year if the company is profitable you would take a percent of that profit (ex 20%) and divide it among all employees. The employees with more tenure, higher number of hours worked, better metrics etc. would receive a larger portion of the company's profit. It just seems reasonable to me that giving employees a percent of profit would boost morale, decrease turnover, increase efficiency, and also decrease corporate waste (ex. paying high level executives 500 times the average pay and bonuses while no one else receives anything). To me it would seem pointless to work super hard at something if you are going to get paid the same no matter how hard you work. This current model seems counter-productive to the work work with the only real benefit to working hard and efficiently is that you might not get fired before someone else. Any thoughts on this?

[Mrtreasuretoupee]

I think its a great idea, however I know a lot of people that will label this some sort of communist conspiracy to steal money from the rich.

[Much Fishing to Do]

Totally agree.  But now all the risk/return is regulated by the government to be taken away from the employee even if they wanted to take part in the risk/return.  You have to basically be a partner to stay away from these regulations.  Currently if a company tried to not to pay an employee in a year that was a loss they'd be breaking all kinds of laws.

Some companies do do some profit sharing so I guess that's the middle grounds you are referring to, but its barely moving the needle compared to the risk/return people should be subjected to to work hard and focus on being profitable (you don't make a profit, you don't get paid, that will push you)

[SwordGuy]

Some companies offer bonuses every now and then, but these are taxed at an exorbitant amount and generally are not worth the time invested trying to obtain these.

If you are talking about the US tax system, that's simply not true.

The problem you observe is because:

1a) The people who designed the software system did not understand how to properly calculate taxes.
1b) The people who wrote the software system did not understand how to properly calculate taxes.
1c) The people who tested the software system did not understand how to properly calculate taxes or were bad testers.
1d) Or possibly management overruled them and sold the product anyway.

or:

2a) The payroll clerk doesn't know how to use a system that calculates correctly, or
2b) The payroll clerk doesn't know how to properly calculate taxes manually.

[Davids]

While bonuses are taxed very high upfront everything works itself out when you do your taxes. Unfortunately payroll systems are not great at properly calculating taxes to be taken out. Case in point my wife works part time by choice. She may have a pay period(every 2 weeks) where she only worked 16 hours and no federal taxes are taken out and another pay period where she worked 40 hours and gets federal taxes close to appropriate. I think the way the system for pay is fine. It is up to the employee to properly negotiate their salary.

[Jouer]

I was just thinking that the way we are compensated for work is completely absurd. With the current system you either get paid a set amount per hour or a salary independent of how much profit a company pulls in. Some companies offer bonuses every now and then, but these are taxed at an exorbitant amount and generally are not worth the time invested trying to obtain these. I think it would make more sense to pay people hourly with benefits, and every year if the company is profitable you would take a percent of that profit (ex 20%) and divide it among all employees. The employees with more tenure, higher number of hours worked, better metrics etc. would receive a larger portion of the company's profit. It just seems reasonable to me that giving employees a percent of profit would boost morale, decrease turnover, increase efficiency, and also decrease corporate waste (ex. paying high level executives 500 times the average pay and bonuses while no one else receives anything). To me it would seem pointless to work super hard at something if you are going to get paid the same no matter how hard you work. This current model seems counter-productive to the work work with the only real benefit to working hard and efficiently is that you might not get fired before someone else. Any thoughts on this?

(bolding mine)
What you are describing here are bonuses. That's how they (often) work at a high level.

[SwordGuy]

While bonuses are taxed very high upfront everything works itself out when you do your taxes. Unfortunately payroll systems are not great at properly calculating taxes to be taken out. Case in point my wife works part time by choice. She may have a pay period(every 2 weeks) where she only worked 16 hours and no federal taxes are taken out and another pay period where she worked 40 hours and gets federal taxes close to appropriate. I think the way the system for pay is fine. It is up to the employee to properly negotiate their salary.

Variable number of hours worked is a qualitatively different issue than a one-time bonus payment.

Most payroll systems do the following:

1) Note the pay for that payroll period.
2) Multiply the pay by the number of pay periods in the year, to get annual pay.
3) Calculate the annual tax for the annualized pay.
4) Divide the annual tax by the number of payroll periods to get the tax to withhold from that paycheck.

That's wrong.

1) Note the pay for that payroll period that is repetitive pay and that which is a one-off payment (i.e., a bonus).
2) Note the pay already received in prior pay periods in that tax year.
3) Note how many pay periods, including the current one, remain in the tax year.
4) Note how much tax has already been withheld this tax year.
5) Compute Annual pay by this formula:
       Prior Pay + Current One-Off Pay + (Number of pay periods remaining * Current Repetitive Pay)
6) Calculate Annual Tax from Annual Pay.
7) Subtract Prior Paid Tax from Annual Tax and divide that amount by the number of periods remaining to get how much tax to subtract from the paycheck.

Doing the payroll this way has several advantages for the employee:

1) One time bonuses aren't over-taxed by assuming the employee will make that much money each pay period.  This way, they don't have to wait until they get a tax refund to earn the full non-taxable bonus amount.

2) It softens the tax withholding when someone works a whole bunch of hours (especially when they are getting a higher rate).
If someone works a whole lot of extra hours later in the year, it won't have much effect on the tax calculations since the overall pay for the year will be close to correct.   If they worked those same hours in the first payroll period of the year, the software would reduce the taxes in the next, regular pay period to even it out early (instead of waiting for a tax refund). 

[Paul der Krake]

Pay for performance brings its own set of problems too. It's a great way to incentivize short term gains at the expense of long term vision.

[Morning Glory]

Great idea, but some companies are non-profit, and some departments do not make money no matter what. On the tax thing, my company lets us change our W-4 online whenever we want, so many coworkers will just say they have 10 dependants during months that they work a lot of overtime.

[inline five]

Lots of accounting tricks to show little profit when you really made a boat load.

These agreements would have to be ironclad in order to pass muster.

It could incentivize employees or it could be impossible to find people to work for below market rates.

[dreams_and_discoveries]

Your basic idea comes across a bit Marxist, yet you are also anti progressive taxes...puzzled...

I was surprised that you feel tenure and hours worked should be compensated more, I find that an old-fashioned viewpoint, and personally I believe value added and quality of work should be rewarded.

And I think model works ok, the hourly wage for jobs that need done, generally lower skilled and little differentiation between who does it, salary for higher skilled/more subjective jobs and bonuses for companies that want to incentive staff in a certain way, using cash to drive behaviours.

Here's a question, what do you think of a company that lets staff set their own salaries? Or one where everyone votes on salaries?

[Fastfwd]

I don't like the idea of sharing profit too much because I have seen it being applied. I worked in a place where the bonuses where the same across the entire department and also adjusted to a multiplication factor from the company's results. Let's say on a given year a dept that meets its objectives gets 15% bonus and then * 1.1 because the company overall did very well too.


but


This removes any incentive to work more or be better than your coworkers because the bonus is the same no matter how well you did.

[sokoloff]

This removes any incentive to work more or be better than your coworkers because the bonus is the same no matter how well you did.

Are you competing with your coworkers or competing with your business' actual competition?

My incentive to work hard and do a good job is to make the company more successful (make the pie bigger), not to be better than Bob your coworker (make my share of the small pie bigger).

[Fastfwd]

This removes any incentive to work more or be better than your coworkers because the bonus is the same no matter how well you did.

Are you competing with your coworkers or competing with your business' actual competition?

My incentive to work hard and do a good job is to make the company more successful (make the pie bigger), not to be better than Bob your coworker (make my share of the small pie bigger).

As an employee I compete with my coworkers for a slice of the salary budget pie. As an investor I would want the company as a whole to perform and that would also be better accomplished with each employee being incentivized to give their best.

[marty998]

This removes any incentive to work more or be better than your coworkers because the bonus is the same no matter how well you did.

Are you competing with your coworkers or competing with your business' actual competition?

My incentive to work hard and do a good job is to make the company more successful (make the pie bigger), not to be better than Bob your coworker (make my share of the small pie bigger).

As an employee I compete with my coworkers for a slice of the salary budget pie. As an investor I would want the company as a whole to perform and that would also be better accomplished with each employee being incentivized to give their best.

One needs to be mindful it's so much easier for an employee to sabotage the work of another instead of outperforming them on merit.

Thus relative employee performance cannot be the only determining factor in bonus pools.

[Linea_Norway]

My DH has twice had the opportunity to buy shares in his own company for a reduced price. This has proven to be a good deal. The shares became worth more and they paid dividend, about 10% per year. This is a way to let employees take share in the profit, but only if the company as a whole works well, so not an individual bonus.

[Papa bear]

1) in the US, bonuses are not taxed differently than your "normal" income.  Your company may be dumb and withhold it differently, because they are dumb. And it was mentioned above the multiple reasons why companies can be dumb.
2) there are some companies that do offer profit sharing, including publicly traded companies, at all levels of tenure/job title. Just know that during downturns, your total compensation will be below market rates.
3) go into sales and get paid for your performance.

Everything you suggested already exists. You just don't work for those companies. Go find a job there if you don't like your current situation.





Sent from my iPhone using Tapatalk

[TomTX]

Some companies offer bonuses every now and then, but these are taxed at an exorbitant amount and generally are not worth the time invested trying to obtain these.

NO. Just No.

Bonuses are taxed at the exact same rate as other earned income (in the USA). Whether you get a $1,000 per month raise or a $12,000 bonus, you pay precisely the same Federal taxes.

Your company is apparently over-withholding bonuses. Either reduce you withholding amount, or just wait til you file your taxes and get the extra refunded.

[Paul der Krake]

Yeah well my cousin Dave got a raise at work and that bumped him into a higher bracket. Now he earns less. Thanks Obama!

[TomTX]

Yeah well my cousin Dave got a raise at work and that bumped him into a higher bracket. Now he earns less. Thanks Obama!

Paul, some of the noobs are going to believe you. ;)

[MDM]

For all those blaming the company for inappropriate withholding on bonuses, your outrage is misplaced.  Instead, talk with your congressional representative.

See 26 CFR 31.3402(g)-1 - Supplemental wage payments. | US Law | LII / Legal Information Institute, and for a simpler version, IRS Provides Guidance on Proper Income Tax Withholding for Nine Common Supplemental Wage Payment Scenarios | Lorman Education Services.  The company does have to follow the law.

As several have also said, the amount withheld from any single paycheck is irrelevant to the actual tax due for the year.