Does Your Farm Business Need a Formal Compensation Structure?

Wages and salaries are a significant expense in a labour-intensive farming business. Working in the field, most of the time you offer meals, cover the training costs, fuel allowance, housing, and sometimes even give interest-free loans to workers. If you don’t account for these costs, you will never know how much you spent, which can slim your profit margins and cash flows. Sometimes, you may give generous bonuses to a few employees, which, without a formal structure, could eat into the bonuses of other deserving employees. Money is a compelling motivation, and when distributed unfairly, it could discourage employees. As an employer, it is your moral duty to give fair wages and perks to every deserving employee. A formal structure can ensure compensation is aligned with your business goals and distributed fairly. Let’s see how. 

Elements of a Formal Compensation Structure

A farm business may employ full-time and seasonal workers, as well as family members. When it comes to giving compensation for their work, all workers should be treated equally and fairly for the work they do. 

This requires clear compensation policies, detailing things such as the base salary or wage, cash perks including bonuses, fuel costs, in-kind perks like meals or housing, and development perks like training or skill upgradation workshops.

Next, you need to ascertain when to give these perks and for what type of work or achievement. For instance, you can offer a bonus to workers who have worked extra on the farm in the past month or have made maximum sales in the market. 

The timing and frequency of the perks offered are critical for the financial balance of your business. While a bonus can be a one-time expenditure, a pay raise continues as the new base salary for the long term. You need to be financially sound to bear the higher costs without adversely affecting your farming capital and profits.

How to Set Up a Compensation Structure?

Creating a formal compensation structure is more than determining the bonus amount and perks. These should align with your business goals, budgets, and finances, and support growth.

Setting Guidelines for Perks and Compensation

The most effective way to offer perks, such as bonuses, is to align them with your farming objectives. For example, you can provide bonuses to employees for reasons such as – 

• Doing extra work and increasing yield
• Not taking a single day of leave in a month or being punctual throughout the peak season.
• Putting in efforts to complete an important task, such as helping with installing a new irrigation system or repairing and doing a maintenance check of vital farming equipment.
• Achieving significant milestones, such as completing a certain number of years on your farm or making higher-than-usual sales at the market. You can also offer a bonus to celebrate a farm business milestone, such as achieving higher profits or expanding into additional land. 

Apart from cash bonuses, you can also offer employees perks such as low-interest loans for housing, free meals on the farm, or financial help with their children’s education.

How does this help? It makes the employees feel valued and appreciated, encouraging them to do their work with renewed enthusiasm, commitment, and an increased sense of responsibility. This, in turn, helps the farm to yield better results and the business to grow sustainably. 

Setting a Budget for Perks and Employee Loans

While giving perks and bonuses is a great productivity booster, they come from your business’s operating costs, and that is why you need to set a cap on how much you can spend on them. This requires proper budgeting based on actual figures. 

Consult with a financial advisor to determine if your business has the financial resources to offer pay raises, which will need to be sustained in the long term. Determine how much you can afford to spend on these perks or loans without compromising on your capital. It is vital to avoid the trap of prioritizing employee satisfaction over business needs. Not only will this harm your business prospects, but it will also ultimately sour relations between you and your employees in the long term, as you might not be able to fulfill their future requests due to a lack of funds. Hence, it is better to set controls from the beginning to avoid inflated expectations and unaffordable expenses.

Maintaining Proper Written Records

No matter how many employees your farm business engages, clearly defining all farm-related and employee-related policies on paper is always a good idea. Clearly define the terms of compensation and criteria for bonuses (including how they will be calculated), raises, or perks with no room for misinterpretation or confusion. Use measurable criteria such as how many hours of work constitute an eligible overtime bonus or what percentage increase in yield or sales can win an employee a perk.

Share these terms with your employees at the beginning of the farming season or as a handbook to newly-joined farmhands on their first day of work. Also, communicate any changes in policies to employees over time.

Maintaining updated employee records and detailing compensation policies provides much-needed transparency in financial dealings with employees and can also help prevent future legal issues. 

Account for Tax Benefits and Costs

The bonus you pay to employees is a business expense that can be deducted from the company’s taxable income. It gives you the dual benefit of tax deduction and employee motivation. When paying the bonus, ensure you, as the employer, deduct withholding tax and report the bonus amount in the tax slip given to employees, along with regular wages. 

Does a Farm Business Need a Formal Compensation Structure? 

All this being said, there might still be some farm business owners who may wonder if formalizing their compensation structure is even necessary. This is because in some ancestral farming businesses, employee loyalty spans generations. Such relationships have been sustained for years on the foundation of mutual respect and affection, and introducing formal documentation might be viewed in a bad light. However, it is essential to inform such employees that not only will the documentation be necessary for business compliance, but also for safeguarding their own interests. 

A proper written compensation policy helps bring fairness, equality, and operational ease to your farm business. It is an efficient and effective way to manage your farm business finances smartly, reward your employees fairly, and help your farm business grow sustainably.

Contact KSSP Partners LLP in Markham to Help You with the Compensation Structure

Talk to a skilled business consultant to help you crunch the numbers, prepare a budget, and develop a sustainable compensation structure that can support business growth. At KSSP Partners LLP, our accountants and business consultants offer services including budgeting and establishing bonus and pay structures. To learn more about how KSSP Partners LLP can provide you with the best accounting and business consulting expertise, contact us online or by telephone at 289-554-5997.