Understanding the True Cost of Hiring Employees

When hiring a new employee, potential candidates often focus solely on the salary. However, for employers, the cost of an employee extends far beyond this figure. It includes recruiting, onboarding, training, and various other expenses, which can cumulatively amount to nearly half a year’s salary before the employee begins to contribute productively.

As you plan to expand your business and hire new staff, it is crucial to understand how to calculate the true cost of each employee. Besides the salary paid to the employee and contributions to the government, additional overheads such as equipment, training, and other costs are involved. These costs can vary based on the size, type of business, and the employee’s role. So, how do you determine the true cost of an employee?

Calculating the Total Employee Cost

The actual employee cost encompasses the total compensation, including the benefits package, taxes, and any additional costs your business incurs during the hiring process. This cost can differ significantly across industries, typically accounting for around 60% of total expenses.

Joe Hadzima, a senior lecturer at MIT, devised a formula offering a safe estimate for budgeting new hires: an employee’s total cost ranges from 1.25 to 1.4 times their base salary, considering salary, benefits, and taxes. For example, an employee with a $35,000 annual salary actually costs between $43,750 and $49,000.

Similarly, CNN reporter Jose Pagliery noted that the real annual cost per employee can be 18-26% more than the base salary, which can be even higher for larger companies. Therefore, an employee with a base salary of $35,000 might cost between $41,000 and $44,100.

Key Factors Affecting Employee Cost

Several factors contribute to the total cost of an employee:

• Base Compensation: This is the primary component of an employee’s cost, either as a base salary or an hourly wage.
• Recruitment Costs: According to SHRM, recruitment costs average $4,700 per hire. External recruitment can incur additional fees ranging from 15-30% of the employee’s base salary.
• Onboarding and Training: It can take up to 12 weeks for new hires to reach full productivity, during which they cost 25-75% of their wages in training costs.
• Overtime and Time Tracking: Unplanned overtime can significantly increase costs. Using a time tracking system can help manage this effectively.
• Employee Benefits: Offering benefits like health insurance, which can be a significant expense, plays a crucial role in attracting and retaining talent.

Strategies for Managing Employee Costs

Accurately calculating employee costs is an essential budgeting practice. It provides a clear picture of each employee’s cost, enabling effective cost management and project profitability analysis. By understanding these costs, you can implement strategies to retain talent while maintaining a healthy work culture.

As your business grows, understanding employee costs helps you budget accordingly and decide whether you can afford additional team members. Tools like Traqq can aid in tracking work hours accurately, ensuring fair compensation and optimizing productivity.