Total labor Costs in Colombia
After four articles that waxed emotional about entrepreneurship, let’s move on to a more technical topic that’s less subject to discussion: the total cost of labor in Colombia (company cost or cost to company -CTC-). This issue is of vital importance in this crazy world of entrepreneurship for the following reasons:
An employee who currently earns $2 million Colombian Pesos (COP) in Company A and is getting ready to start their own Business B, must understand that the cost of being paid in their new company is not just $2M COP for 12 months.
Paying $2M COP under a service agreement is not the same as paying a $2M COP salary or comprehensive contract.
New startup companies in Colombia need to know what social benefits or payroll taxes they have to pay for every $1M COP they pay in salary.
Not all salary ranges have the same tax burden or workload.
It’s common for new entrepreneurs to calculate the price of services based on what they’re currently getting in cash, when at the very least they need to calculate costs and pricing using the final total cost they had in their last job (even if they don’t get paid that amount in cash).
When you want to standardize salaries in order to compare wage scales, the best way to do this is with the total cost.
Taking these issues into consideration, I created a model to know the respective total cost multiplier for different salary ranges and according to current law (2015). Over the past six months, several managers in different companies have successfully tested this model multiple times. However, it goes without saying that I’m not an accountant, nor a lawyer, nor an actuary, nor an economist, nor an administrator. I'm just a systems engineer who's keen on getting things right and using the highest precision at the right time.
The model is built using the following assumptions: indefinite term labor contracts, fixed wages, no overtime, paying all legal obligations in a timely manner, only considering labor costs (not those that scale with it – like laptops, work area, furniture, access accounts, etc.), a company without any type of extra-legal benefits (medical insurance, etc.), and assuming that taxes are paid on 100% of the salary, we have the following:
$644,336 COP (1 Monthly Minimum Wage, or MMW) has a total cost of 1.75X if the company does not pay the CREE tax,
$644,336 COP (1-2 MMW) has a total cost of 1.62X if the company does pay the CREE tax,
$1,288,673 COP (> 2 and < 10 MMW) brings a total cost of 1.40X,
$6,443,360 COP (>= 10 MMW) the total cost is 1.53X,
$8,376,368 COP (>= 13 MMW) if it’s total compensation and not base salary, the total cost is 1.27X,
With these multipliers you can calculate the total annual cost to the employer of paying yourself or hiring labor. For example, if you are offered a service agreement, you can use the multiplier as a divider to find the equivalent employment contract that you are being offered.
Recently Colciencias offered salaries of $6M COP per month to high-level researchers to come from prestigious universities around the world. Many researchers accepted that offer.
Let's do the respective analysis. Due to the < $8M range, these wages are not total compensation, therefore the multiplier is 1.53X. The total annual cost of a senior researcher for a university would be $6Mx1.53 ×12=$110M/year.
We can also analyze how much money a researcher of this caliber would lose if Colciencias or the universities decided to change these $6M from a labor contract to a service agreement. $6M ÷ 1.53=$3.92M, would be the equivalent of earning $4M per month on a labor contract.
These multipliers also imply that in the region of a $10M COP salary, not all that glitters is gold. It’s fundamental to know if payment is total compensation or base salary, because if it’s total compensation then it’s $10M ÷ 1.27X, which is equivalent to $7.8M in a labor contract, a substantial difference.
It also implies that if you earn $6,952,932 COP on an employment contract, you can propose to your employer to change to a total minimum compensation of $8,376,368 COP and improve your cash flow without affecting the profits and loss of the company you’re in.
The staggered intervals also show possible optimizations typical of these models: Paying 2 MMW or 2 MMW + 1 peso implies annual savings on labor obligations of $3.4M without affecting the cash flow or social benefits of the employee.
Finally, this model includes a small historical calculation of severance pay of 1.5% of salary, however it completely ignores other costs (such as SENA apprentices, approximately 1 apprentice of 1 MMW for every 15 employees), provisions for unrecognized disabilities and paid leave that requires replacement, transportation allowances, communications and telework (there’s still crazy people out there). I’m open to hear improvements, so comments on this article aren’t just philosophical discussions anymore, they’re improvements to the model.