The Hot Tub Will Be The First To Go

Fred WhittleseyPay and Performance: The Compensation Blog

 

I’ve been advising clients and the startups that I mentor that the current wave of “cool stuff” being offered to employees and candidates in this booming employment environment is about to end. I’ve used “the hot tub will be the first to go” as the metaphor, and now comes data that while the hot tub and the ping-pong tables may still be in the break room and not yet posted on Craigslist, the trend is visibly slowing.

Is the Bubble Bursting? The Truth Could Lie in Ping-Pong underscores my hot tub theory.

But aside from this new macroeconomic indicator, this is the tip of the “free stuff” compensation iceberg. Employers are spending a lot of money on free stuff for employees, employees (or some employees) value the free stuff, so it qualifies as compensation. It is an expense for the employer – for ping-pong tables, classified by accountants as “plant, property, and equipment” or “leasehold improvements” but not as “wages.” But, for the most part, not taxable to the employees.

But there are four significant issues created by all of this free stuff.

  1. These expenses, and the value of the free stuff to employees, are not included in the calculation of “wages.” This is at the root of the “stagnant wages” accusation as the calculation of compensation by the government and all compensation surveys excludes the substantial amount of “compensation” being offered to employees. It doesn’t fit into the box that was invented decades ago.
  1. This further fuels the purported “gender pay gap” because work environments that offer indirect forms of compensation that appeal to females – paid maternity leave, remote work, onsite childcare, 40-hour work weeks – tend to (surprise!) attract a disproportionate number of females, and all of those compensation expenditures aren’t factored in the way that Google RSUs count as explained in #1 above.
  1. The big HR issue that this has presented – and no one likes to say this out loud for being labeled a bigot of some type – is that not everyone likes the same thing. Not everyone likes to play ping-pong. People with dry skin may not be able to use the hot tub. People who are single and childless get zero compensation from maternity and paternity benefits. People who don’t have a dog, or don’t like dogs, or are allergic to dogs may get no value, or actually incur a personal cost, by an employer policy allowing dogs at work – and don’t think that this policy doesn’t create a huge expense for the employer. And of course, healthy people get less benefit from paid sick days but at least they can access that form of pay by lying to their boss; much harder to do the same to get maternity benefits.
  1. Back to the tax issues: the giving of cool stuff to employees is supported by the bizarre Internal Revenue Code which says that some forms of pay are taxable – salary, stock, paid time off, paid membership to a gym – while others are not – ping pong tables, hot tub soaking, privileges to exercise at the onsite employer gym. Notice the ridiculous disparity between an external gym and an onsite gym. Oh, and healthcare. You may have noticed that employers can give healthcare insurance to employees and their dependents, pay 100% of the cost which might be $25,000 per year, and the employee pays zero tax on that. But if they give the employee a $25,000 car, that is $25,000 of taxable income. $25,000 worth of free lunches for an employee is not taxable income, but the IRS has made it a major priority to change this.

This interaction of employers competing for talent, the “invisible” expense of indirect compensation, and perverse tax incentives has led us to the current “total rewards” environment – particularly in the tech sector and among startups – that is a complex mosaic of cash, benefits, equity, time, and free stuff. And it is very, very expensive for employers even if it doesn’t count as “compensation.”

When the downturn hits (or gets worse, depending on your point of view), hopefully the hot tub and the ping-pong table and the dogs at work will be the first to go. That model is a lot better than the traditional layoff model which has one predictable effect in a recession: making the recession worse.