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
- The term sales to working capital ratio refers to a calculation that allows an investor-analyst to understand if a company is facing a liquidity problem. Since the metric can vary by industry, this ratio is best used as a benchmark and / or tracked over time.
Moneyzine EditorSeptember 21st, 2023 
The maintenance expense to fixed assets ratio allows analysts to understand the age or condition of the company's equipment. An increase to a company's repairs and maintenance expense to fixed assets ratio over time can signal aging equipment or assets that are being pushed to their operating limits.Moneyzine EditorJanuary 24th, 2024
The accumulated depreciation to fixed assets ratio allows analysts to understand if new assets are being deployed by the company. An increase to the company's accumulated depreciation to fixed assets ratio can indicate management is struggling to find the cash necessary to make new investments.Moneyzine EditorJanuary 16th, 2024
The capital to labor ratio allows analysts to understand if costs are being reduced by purchasing assets to automate labor-intensive tasks. An increase to a company's capital to labor ratio over time can signal an attempt to remain competitive, or improve margins, through automation.Moneyzine EditorJanuary 10th, 2024- The sales expense to sales ratio allows analysts to understand how efficient a particular sales channel is at generating revenues. Calculating its sales expense to sales ratio allows a company to direct resources to the most effective channels. Companies can also track this metric over time, looking for movements that might indicate a change in consumer purchasing behavior.Moneyzine EditorSeptember 21st, 2023
- The discretionary cost to sales ratio allows analysts to quantify the unrestricted expenses that can be eliminated in the near term. When faced with an economic or industry downturn, companies can bolster profits by eliminating what are deemed optional expenses. Calculating their discretionary cost to sales ratio allows companies to understand the magnitude of this opportunity.Moneyzine EditorSeptember 19th, 2023
The interest expense to debt ratio allows analysts to estimate the rate of interest a company is paying on their outstanding debt. Analysts can use the interest expense to debt ratio to benchmark the company's cost to borrow against its competitors or peer group.Moneyzine EditorJanuary 22nd, 2024- The term overhead rate refers to a ratio used by analysts to estimate the overhead costs allocated to each unit of production. An increasingly less popular measure, analysts and company management can use the overhead rate to understand the magnitude of costs that are directly related to the manufacture of the company's products.Moneyzine EditorSeptember 20th, 2023
