Fringe Benefits to Salaries Expense Ratio

Definition

The fringe benefits to salaries expense ratio allows analysts to understand how much a company spends on employee benefits relative to an industry benchmark.  A company can analyze its competitive position by benchmarking the cost of its benefits programs relative to the industry or peers.  The metric is also useful when analyzing potential savings opportunities during a merger.

Calculation

Fringe Benefits to Salaries Expense Ratio = (Medical Insurance + Pension Plans + Other) / Total Wages

Where:

  • Other can include fixed contribution plans such as the 401 (k), life insurance, commuter and wellness programs; and
  • Wages include salaries as well as payroll taxes.

Explanation

The fringe benefits to salaries expense ratio allows company analysts to understand the generosity of their company's employee benefits program versus an industry benchmark or potential merger partner.  An employer with $1 billion in wages may spend anywhere from $200 to over $300 million on their employee benefits programs.

Companies are always trying to control costs, and those businesses in labor-intensive industries are constantly benchmarking their benefits plans against their peers.  The fringe benefits to salaries ratio allows company analysts to understand if they are over-delivering on benefits or if there is an opportunity to save on this expense.  Fringe benefits to salary ratios will typically be 0.20 to 0.35, or add 20 to 35% to a company's labor costs.

Example

Company A has approached Company XYZ about a potential merger.  Analysts at Company A believe Company XYZ's employee benefits are overly-generous.  A snapshot of each company's salary and benefit programs appear in the table below.

  Company A Company XYZ
Total Wages and Salaries $21,470,400 $13,955,760
Payroll Taxes $1,502,928 $976,903
Total Salaries and Taxes $22,973,328 $14,932,663
Employee Benefits    
Pension Plans $1,717,632 $1,256,018
Life Insurance $214,704 $139,558
Medical Insurance $3,435,264 $2,093,364
Child Care Subsidies $0 $418,673
Health and Wellness Programs $429,408 $418,673
Total Employee Benefits $5,797,008 $4,326,286
Fringe Benefits to Salaries Ratio 0.25 0.29

Based on the above information, analysts at Company A believe they can lower expenses at Company XYZ by aligning the two benefits programs.  This translates into annual savings of 0.04 x $14,932,663, or $597,307.

Related Terms

sales to working capital, maintenance to fixed assets ratiodepreciation to fixed assets ratio, capital to labor ratio, sales expense to sales ratio, discretionary costs to sales ratio, interest expense to debt ratio, overhead rate