5 minute read
DAVE PRATT
BY DAVE PRATT
Ioften ask audiences at schools and workshops if anyone pays themselves what it would cost to replace themselves. Very few hands go up and those that do are usually attached to the arms of Ranching For
Profit School grads. Many justify not paying themselves a fair wage claiming that their ranch isn’t profitable enough to pay them. If your ranch isn’t profitable enough to pay yourself and other family members a decent wage, then it isn’t profitable at all. Fair wages, paid or unpaid, must be deducted as an overhead cost to calculate profit.
Most family ranches, regardless of scale, are subsidized with free or underpaid labor.
There is nothing wrong with subsidizing your ranch if that’s what you want to do. But shouldn’t you at least know the extent to which you are subsidizing it? To know that, you’ve got to include the full cost of labor. That means showing what it would cost to hire someone else to do all of the work you currently do. Here’s how we figure the wage you ought to show on the books.
If you are like most owner/operators you have a lot of different jobs on your ranch. At times you are the CEO and should be earning $100 per hour. Other times you are the hired hand, earning $15 per hour. These are minimum wages for these positions and assumes you are also getting a benefits package that includes housing and health insurance.
At the Ranching For Profit School we suggest taking two mornings a week to work ON your business as CEO or business manager.
The other 80% of the time you work IN your business as a hired hand.
Do the math:
$100/hour x 4 hours x 2 days/week x 52 weeks a year = $41,600
$15/hour x 32 hours/week x 52 weeks = $24,960
$41,600 + $20,800 = $66,560
If you’re spending two mornings a week working on your business, and the rest the time working in it, $60,000–$70,000 is probably in the ballpark of what you ought to be paying yourself or at least recording on the books.
Of course, underlying these calculations is the assumption that you are a competent CEO and are worth $100/hour when you are working on your business. There is an easy way to know if you are worth $100/hour. If you are taking two mornings a week to work on your business and the business still can’t afford to pay you, then you should probably question your competency.
Compensating “Free” Labor
Most family ranches are subsidized with free, or underpaid, family labor. Sometimes the difference between what family members get and what it would cost to hire someone else to do the work they do is made up with the promise or expectation of sweat equity. But sweat is not a recognized form of currency and people counting on sweat equity usually have a grossly exaggerated idea of what their sweat is worth. This often leads to serious disagreement and disappointment.
If you are going to count on sweat equity and want to avoid the inevitable misunderstandings that happen when it comes time to cash in on your sweat, then you’d better start actually counting it. How many hours? For how many years? At what rate of pay? With what interest on the unpaid balance?
I mentioned the perils of relying on sweat equity in a workshop recently. I suggested we stop using the term sweat equity and call it what it really is, “deferred wages.” My comments apparently struck a nerve with one 30-something rancher. He approached me after the program and asked if I could help him calculate what his sweat was actually worth. He said that he’d come back to the family ranch after college 10 years earlier. He’d been drawing a low wage and banking on sweat equity. As is usually the case in family ranches, there was no formal agreement documenting exactly what his sweat was worth.
He was being paid $25,000 a year, but his compensation package included a nice home, a vehicle and insurance for his family. All-in-all a compensation package worth well over $50,000. “Maybe I’m not as underpaid a I thought I was,” he said.
I suspect that he was probably being underpaid somewhere between $10,000 to $20,000 a year. I showed him that for every $10,000 he’d been underpaid, he earned 0.1% ($10,000 ÷ $10,000,000) x 100 = 0.1%
I showed him that over the previous 10 years, compounding interest at a rate of 3.5%, he’d earned a whopping 1.2% equity stake in the ranch. Like a lot of young ranchers returning home, he hadn’t ever thought about how much his sweat was worth but had assumed that it would add up to a lot more than that.
Sometimes sweat equity isn’t just about compensating someone for the work they do. It’s about acknowledging the sacrifices someone may have made, foregoing other opportunities to come back to the ranch to support the family. If there are several kids in your family, but only one has invested time and energy working on the place and has shown a desire to continue the business, it may be fair to give them an equity position. After-all, as succession planning advisor Don Jonovic points out, fair doesn’t necessarily mean equal. Having these kind of conversations at the beginning of new work arrangements helps families reduce the challenges of disappointment and disagreement later.
When determining deferred wages remember to consider: • How much time • Rate of pay • Value of compensation package/perks • How much interest on balance due
But whether sweat equity is a substitute for a paycheck or acknowledging a sacrifice, we need to be clear about what we are compensating and its value. We need to convert assumptions and expectations into agreements. We need to figure out what our labor is worth. We need to document the value of our sweat while we are still sweating.
For more on documenting the value of sweat equity watch Dave’s video at: https:// ranchmanagement.com/what-is-sweatworth/. This article was part of Dave’s ProfitTips series which you can find at: https://ranchmanagement.com. You can also visit Ranch For Profits Youtube Channel at: ranching4profit.
