May 9, 2005 — Has your boss every told you: "you're an asset to the company"? If that's true, asks Dave in Texas, why don't companies list their employees on the books along with all their other assets? Meanwhile, Carol in Oklahoma thinks her credit card company isn't telling her the whole truth about how much they charge. Unfortunately, she hasn't read the fine print.
Why do businesses not put the employees on their balance sheets as assets? It seems that every business always promotes their employees as assets but then doesn't act that way. —David W., Bedford, Texas
For most companies, employees are indeed their most valuable asset. But the accounting industry hasn't yet come up with a standard way of calculating an individual employee's worth as a fixed asset to the company. And it would be a tough assignment if they tried.
For starters, employees aren't fixed assets because the company doesn't own them (not legally, anyway). Workers are free to get up and leave any time they want. Unlike, say, a new factory.
But even if a worker is locked into a long-term, wriggle-proof, non-compete contract, how do you put a value on a human life? In lawsuits involving wrongful death of an individual who died young, courts will often look at that person's potential earnings power calculated over their expected lifespan. I was once asked in an interview right out of college: “If I hire you and you stay for 20 years, we’ll likely pay you more than $1 million by the time you retire. Why are you worth that much?” (I hadn’t prepared an answer for that one.)
Managers do assign value to employees already on the payroll when they decide how to hand out raises or slice up the bonus pie -- presumably based on an individual's contribution to the bottom line. (Though no doubt these awards are also skewed by lobbying on the golf course or the same kind of alliances formed on a typical reality TV show.)
But how do you value the contribution of the young engineer who may come up with the breakthrough product that transforms a company? And if people were carried on the books as fixed assets -- like a delivery truck or copy machine -- would you "depreciate" their value over time? Is the 55-year-old career veteran less valuable because of "wear and tear" -- or more valuable because of the wisdom and experience she brings to the job?
Eventually, employees do show up on the balance sheet. There's a line on the asset side where the talent and expertise of the work force is mixed in with a lot of other things that are sometimes hard to put a number on -- like brand awareness and patents. That's the line called "intangible assets" -- which is really as close as you can get to describe the value of a company's workers.
Employees also show up again -- as a liability. Companies have to set aside funds for pensions and retiree health benefits they expect to have to pay in the future. And unfortunately, when it comes time to cut costs, that’s the side of the balance sheet that usually gets the most attention.
Why are banks allowed to mislead consumers? I have a credit card that told me I was paying zero percent interest. Of course. I pay my balance if any in full each month. Then, I asked what my interest actually would be if I didn't pay my balance in full. It is: 6 percent above the prime. Who's prime? The bank's prime which happens to be 9 percent. The prime is not the prime? What dogs! —Carol D., El Reno, Okla.
The phrase "prime rate" dates back to the days when businesses did most of their borrowing from banks -– and the best customers got the “prime” rate. (Those days are long gone -- most big companies today borrow in the capital markets by selling their own bonds or what's called "commercial paper" -- basically, short-term loans. Smaller companies can set up lines of credit -- sometimes below prime.)
But the name stuck. It now refers to a benchmark lending rate that is raised or lowered as the Federal Reserve adjusts the rate it charges banks' when they borrow, the so-called "discount rate." The "consensus" prime rate today is 6 percent (what most banks charge), according to the Wall Street Journal. But every bank is free to set its own prime.
Banks then mark up that rate for commercial and consumer lending, adding another point or two (or, in your case, six) depending on the type of loan. Because credit card lending is "unsecured" (the bank can't exactly repo the movie ticket or dinner you just charged on your card), credit card rates are the highest.
Banks defend themselves from complaints that their marketing is deceptive by pointing to the multi-page, microscopic-print document that eventually shows up in the application process. And they've got a point: they do spell out all the ugly details. (On the Web, it's that multi-screen page where you click "I accept.") Often written by lawyers for lawyers, these dense disclosures are rarely read through by credit card customers. And banks know this. Most customers assume that the marketing pitch they get in the friendly brochure -- touting "low rates" and explaining how "easy" is to use your shiny new card -- tells the whole story. It doesn't.
If you do wade into the full disclosure, you’ll see all the nasty terms and conditions that apply to your account -– including things like otherwise undisclosed fees and the bank’s right to jack up your rate if you’re so much as an hour late with a single payment. If you do, you're technically in "default." If so, get ready for your rate to skyrocket. Citibank, one of the biggest credit card issuers, currently charges a default rate on cash advances equal to the prime rate plus up to 23.99 percent, or roughly 30 percent interest. That's a pretty nice vig.
Often, there's a clause in the terms and conditions statement that gives the bank the right to change the rates, fees, and terms of your account "at any time for any reason." Reading through this disclosure document may be tough sledding, but you should give it your best shot.
Make the guy at the bank who's taking your application wait while you do, explaining each and every clause you don't understand. Even if you're there for an hour, you should be clear on these terms before you sign. And if the bank officer tries to rush you along, get up, thank them for their time, and find another bank. Unfortunately, you'll see the same nasty terms and conditions almost wherever you go. But at least you understand what you're dealing with.
And, as always, shop around. My favorite web site for rate shopping is Bankrate.com.
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