Using sweat equity to compensate employees

Sweat equity is a term that is loosely used to define how established farmers use payment of a commodity or capital asset to replace some of the cash wages for employees.

Sweat equity is also the term sometimes used to compensate a successor for years of labor and management that helped build the owner generation’s wealth.

It can be used to justify gifting personal, titled property, or giving a discounted price when the property is eventually sold to the successor.   

When considering labor compensation in forms other than money, the goal of both the employer and employee/ successor should be analyzed to ensure it is an appropriate compensation package. 

Sweat equity used for commodity wages

If the employee’s goal is to learn more about the farm business and gain management/ marketing skills, commodity payments can provide a way to allow him/her to make management decisions on a smaller scale.

Payment of grain would allow the employee to make decisions on when and where to market the grain. Market livestock can provide additional skill development as the employee makes management decisions to raise the livestock to market weight.

From the employer’s perspective, skill development can translate into a better employee who can be given more responsibilities. In addition to skill development, the employer may not have the cash flow to completely compensate the employee, but can provide the commodity as part of the wage package. 

If the employee’s goal is to eventually manage their own herd, payments in breeding stock may be a viable option. With this option it is important to consider where the animals will be housed. 

It is important to consider If the animal stays in the original herd at freshening, but are owned by the employee, how will feed and other ownership costs be paid and how will milk income be distributed?

The employer must consider the long-term implications of the employee’s animals remaining in the herd and taking facility space from the owner’s herd. The employer should determine if they can manage the loss of the income. Or does the owner need to calculate overhead costs and charge this expense to the employee?

Sweat equity is as valuable as cash equity and should have a one-to-one conversion rate. It is therefore important to correctly value the items being given as sweat equity. 

Some commodities have a worldwide market and their value can be more easily determined by this market value. Other commodities produced on farm, such as cattle, may be undervalued if the animal can command a premium above what they could be harvested for.

For these animals an appraiser may be called in to determine their values. This is most commonly done for insurance purposes but also can help determine a baseline value of your herd. To assess the animal’s worth, the appraiser will evaluate the quality of the animal which may include a comparison of your animals to animals of similar quality that have recently sold.

Sweat equity used for succession

When the goal is to slowly transfer business assets to the next generation, sweat equity can provide the transfer of assets to the successor. For example, breeding stock can be transferred to the successor over time allowing them to own a significant portion of the herd. 

This mode of equity transfer can be facilitated by forming a business entity that owns farm assets as shares or interest. These shares or interest can then be transferred to the successor. 

This option, when clearly outlined in a farm succession plan, can provide the successor generation a guarantee that the assets will be transferred and removes the speculation that surrounds a verbal promise.

One thing to consider with this option is how many of the assets can and should be transferred in this way. Is the owner generation dependent on these assets for retirement? If the answer to this question is yes, how many of the assets can be provided in trade for labor and how many need to be retained by the owner or be sold to the next generation for cash to fund retirement needs? 

The use of sweat equity to compensate employees allows their compensation to match their contribution without financially burdening the farm. For those looking to succeed the owner generation, sweat equity allows them to build equity and confidence before the succession occurs. 

It is important to consider if the compensation is equitable for the work done and the tax implications of using sweat equity. 

Schlesser has served as the Dairy Agent for Marathon County since 2012.