The Genuine Cost of an Employee

By admin | 28 Aug 2023

"The valuation of a business hinges on the adept management of financial and intellectual resources through human capital." (Dave Bookbinder, author)

Calculating the authentic cost of an employee involves numerous factors. According to the US Small Business Administration, employees actually incur costs ranging from 1.25 to 1.4 times their monthly wages. Comprehending the reasons behind this is pivotal in determining if the company can genuinely afford to onboard a new team member. Accurately assessing the actual cost of an employee aids in formulating improved budgets, more precise product costing, and ultimately, heightened profits. Here are the key considerations prior to making the decision to hire a new employee.

• Compensation: The monthly remuneration extended to an employee generally serves as the foundation for gauging the affordability of their recruitment. Naturally, the entire "Total Cost to Company" monthly compensation must be factored in, encompassing taxes, UIF (Unemployment Insurance Fund), and any incorporated elements such as stock options or medical benefits. The salary also encompasses the expense of paid leave. Legally, all employees are entitled to holidays and sick days. These are days during which you are disbursing wages to the employee without gaining corresponding output.

• Additional Workforce: When enlisting new personnel, there's also the consideration of employing others to oversee their management, oversee the recruitment process, manage employee disputes and grievances, and ensure timely remuneration each month. While novice business proprietors might initially handle this for one or two new employees, the demands can swiftly become overwhelming in terms of time, diverting the company owner from their essential duties. Thus, it's advisable to evaluate the costs of HR, finance, and middle management separately, providing a clearer view of the ongoing expenses linked to each employee.

• Initiation and Training: The expense of hiring an employee starts accumulating from the moment you begin drafting the job advertisement. How much time is expended reviewing CVs, conducting interviews, and conducting background checks? Post onboarding, they'll necessitate training in company protocols and procedures, entailing time to adapt to their role. How much of other employees' time is utilized for this instead of their designated tasks? Employers must also anticipate that peak performance won't be instantaneous, incurring a cost due to diminished productivity.

• Resources: Every newly hired employee necessitates equipment, the cost of which varies according to your industry. This includes everything from work attire to laptops and corporate mobile phones, as well as workstations, chairs, and meeting spaces. What software requires installation, and what's the yearly subscription expense? How much office area does each employee occupy? What's the monthly rental for that space? Additionally, ancillary expenses like consumables, lighting, stationery, and even provisions like coffee, tea, utensils, and mugs should be accounted for.

• Overtime, Incentives, and Advancements: Though usually discretionary, certain sectors may unavoidably involve overtime. Over time, business proprietors might also contemplate offering bonuses or promotions to maintain employee contentment and productivity. These costs accumulate and should never be overlooked.

If navigating all of this feels daunting, contact us for insights into whether hiring a new employee aligns with your business's best interests.