Payroll vs. Owner's Compensation

Payroll Costs Vs. Owner's Compensation

I've talked about the correlation between payroll costs and owner's compensation many times in the past. Payroll costs play a greater role in determining bottom line profitability than any other major expense category. If you're having trouble in your business the chances are very good that many of those problems can be traced to payroll costs that have gotten out of hand.

Believe it or not, key expense categories such as cost of goods or general overhead expenses have remained, as a percent of sales, almost the same as they were 30 years ago in this industry. While COG and Overhead Expenses have remained the same, owners have allowed payroll expenses to continue to increase. I've provided the chart below to illustrate my point.

Note the difference in total payroll costs for those companies in the bottom 25% of the industry (0-25%) against those in the top 2quartile (76-100%).

By the way, contrary to popular opinion, companies with the lowest payroll costs typically pay the highest wages, they just employ far fewer people to do the work and the people they do employ are far more productive due to their skill levels and the equipment they are asked to operate.