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Accounting: Direct vs. Indirect Compensation 2 Views
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Transcript
- 00:00
Accounting Allah shmoop direct versus indirect compensation Well everyone likes
- 00:09
to get paid right There are very few retail clerks
- 00:12
working pro bono So how do people get paid Who
- 00:16
has power inside of a corporation like who makes the
- 00:19
most money The more power and impact the Maurin employee
Full Transcript
- 00:22
gets paid right Well that's the theory Sorta So let's
- 00:26
think about Ford the car company Not those watery things
- 00:29
in Norway Meat blob He was supposed to be named
- 00:32
Bob but his dad screwed up on the birth certificate
- 00:35
anyway Blob is afford employees who shapes the final edges
- 00:38
of the engine block The fourth secured onto the frame
- 00:41
of the car making sure the pistons go up and
- 00:43
down very smoothly So the engine you know works That
- 00:47
guy's about as core to your manufacturing business as it
- 00:51
gets Call him Mr Direct as in direct expense Now
- 00:56
meet nastily a similar birth certificate snafu there She's a
- 01:00
lawyer who ensures that the paperwork you've submitted which shows
- 01:04
your crash test dummies aren't riddled with bumps and bruises
- 01:07
was properly received by the government That gal overseas A
- 01:10
lot of the communications paperwork between Ford and the Feds
- 01:14
and yeah you might have downsized her awhile ago but
- 01:17
she's been with company thirty seven years and she's best
- 01:20
buds with a bunch of people inside and outside The
- 01:22
company called her Mrs Indirect Why does this distinction matter
- 01:27
Well because many corporations account for employees who are direct
- 01:30
differently from those who are in direct as in costs
- 01:34
you know to the company making the stuff they make
- 01:36
Think about how the notion of gross margin works The
- 01:39
really important stuff happens above the line The rest is
- 01:43
all about shipping and tracking and selling and meet a
- 01:45
ring and measuring and all that stuff but not making
- 01:48
not making the core product that the company actually lives
- 01:52
on Tio survive You can't build a Ford car without
- 01:55
Mr Direct without a properly secured engine and the Pistons
- 01:59
actually work in the car would well just not go
- 02:02
In fact it would probably blow up But without Miss
- 02:05
Indirect afford would be just fine Probably for a decade
- 02:09
Maybe forever Miss Indirect is really just overhead and the
- 02:13
cost of keeping her working would usually be put into
- 02:16
a different area Definitely not in the gross margin calculation
- 02:20
because Mr Direct is needed to make the engine and
- 02:23
miss Indirect is not If you're ever wondering you want
- 02:27
to be Mr Direct not miss Indirect So moving on
- 02:30
what our pensions and they're kind of related here you'll
- 02:33
get why they're a good example of an indirect compensation
- 02:37
Well unless you live on Mars you've heard about pensions
- 02:39
and a wide range of legal ethical political and social
- 02:42
arguments surrounding them Their controversial in part because of the
- 02:45
way in which government workers who get them ignore their
- 02:49
value when they begged the public form or tax dollars
- 02:51
form or annual compensation for them That is a given
- 02:54
government worker who works eight months a year might complain
- 02:57
that they only make forty five thousand dollars but in
- 03:00
reality they get an additional eight grand a year in
- 03:02
pension contributions I'ii forced savings and or investment and another
- 03:06
five grand a year in health benefits another two grand
- 03:09
a year in other benefits so that in fact it
- 03:11
cost taxpayers to pay that government workers something more like
- 03:14
sixty grand a year to work eight months rather than
- 03:17
forty two grand And if you extrapolated the money for
- 03:19
those eight months Well it would equal liberate to something
- 03:22
more like a ninety thousand dollars a year Job or
- 03:26
90000 in cost to the company employing them But it
- 03:29
doesn't behoove the government workers to point out all of
- 03:32
these facts during election season So they just quote that
- 03:35
forty two thousand dollar number and hope that at least
- 03:37
for a while the population feels charitable toward them and
- 03:40
votes in tax hikes So what exactly is a pension
- 03:44
Well it applies to both corporate America and the government
- 03:46
and in both cases a pension is essentially forced savings
- 03:50
for the employees of whoever dot com A given secretary
- 03:56
makes fifty six thousand bucks a year in salary and
- 03:59
has a pension of ten grand a year at ten
- 04:01
thousand dollars is not paid to her directly Instead the
- 04:04
pension money is invested on her behalf usually in a
- 04:07
traditional mutual fund or index fund Well why doesn't her
- 04:10
employer just give her the ten grand so she can
- 04:12
invested on her own Well there really two reasons behind
- 04:15
this structure The first reason revolves around the idea that
- 04:18
employees will be earning less money in their old age
- 04:21
than they were in the prime of their careers like
- 04:23
in their thirties forties and fifties The marginal tax rate
- 04:26
in our progressive tax system is much higher for higher
- 04:29
dollar amounts earned like you pay a higher percentage of
- 04:32
your hundred thousand dollar earned than you did on your
- 04:35
thirty second thousand dollars Got it So when people withdraw
- 04:38
their pension money from whatever amount it has compounded to
- 04:42
over the course of their careers investing it well it
- 04:44
will likely be taxed at a lower rate than it
- 04:47
would be or would have been had the employees made
- 04:49
sixty six thousand dollars a year in salary instead of
- 04:52
that fifty six thousand dollars plus the ten thousand in
- 04:55
pension contributions Right So it's a little bit of attacks
- 04:58
edge there and a certainty that then we don't have
- 05:00
millions of people who weren't disciplined and didn't save money
- 05:03
for retirement wandering the streets and living in station wagons
- 05:06
down by the river Yeah second reason for this structure's
- 05:09
existence is that when it comes to the discipline of
- 05:12
actually saving money to many people in this country are
- 05:15
simply complete idiots Rather than trying to avoid a future
- 05:19
as a destitute old person living in that station wagon
- 05:22
You know right here in the Winnebago camp in the
- 05:25
cheap parking space they decide to take that nice business
- 05:28
class trip to Hawaii every year Instead they just figure
- 05:31
uh they'll figure it out later forcing people to have
- 05:34
a savings not at the end of their lives Mama
- 05:36
government essentially protects her citizens or at least a large
- 05:40
handful of them from being a social eyesore and a
- 05:43
liability to the rest of the responsibly taxpaying citizenry who
- 05:47
actually did save for old age and didn't do that
- 05:50
Hawaii trip so expensively every year Well structurally Just think
- 05:53
of pensions as incremental cost to the company and hiring
- 05:57
employees And at this stage of the game don't worry
- 05:59
about the politics of everything fell just a Jew fast 00:06:05.628 --> [endTime] Shmoop
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