How to Determine the True Cost of Your Employees

 
 

 

Hiring employees is one of the biggest challenges many businesses face. In addition to finding the right people with the necessary experience or qualifications, you have to make sure you can afford them. 

 

But these days, economic uncertainty makes growing your workforce more fraught than usual. At the end of 2019, only 35% of small businesses were considered healthy; those that weren’t were three times more likely to close or sell as the result of a sudden crisis, such as the pandemic that hit this year. Today, 57% of small and mid-sized organizations say they’re struggling to keep their businesses going. 

 

Every dollar spent carries more weight, including the dollars you spend on your employees. But the true cost of employees goes far beyond base salary, and if you don’t know what those other cost variables are or how to budget for them, you can quickly put your business in an economic bind.

 

When you can accurately calculate the cost of employees before you hire, though, you’re able to make much more strategic, cost-effective staffing decisions that benefit your business now and into the future. Here’s a closer look at employee costing, why it’s important, and how you can control the cost of labor while still maintaining the employee skill sets you need and the business culture you want. 

 

What is employee costing?

Employee costing is the process for determining the amount you actually spend on each employee, which includes wages plus all other expenses — or overhead. These expenses can include everything from payroll and all the related taxes (federal, state, and local) to health coverage, fringe benefits like life insurance or retirement plans, as well paid time off, meals and perks, and even bonuses and commissions. Some expenses are mandatory, like taxes, while others can be unique to each business. 

 

Figuring out each expense separately is a common approach to employee costing. In general, you can start with the following list to reach a total per employee:

 
  • Base salary range. Come up with a salary range that takes into account your future growth plans — what you can afford to pay new hires vs. what you can afford to pay more senior employees over time — as well as the cost of living in all locations where your business operates. 

  • Employment taxes. Add up the cost of Social Security, unemployment, and workers’ compensation at their current rates.

  • Benefits, perks, and other compensation. Tally the cost of all benefits like health coverage, long-term disability insurance, 401k retirement plans, tuition reimbursement, and others that are included in your typical benefits package, along with any other perks or forms of compensation you give your employees. 

  • Physical space. If your employees work in a building, determine the cost of the physical space that each employee might need, such as an office or cubicle, in terms of a percentage of the rent or lease you pay.

  • Equipment and supplies. Determine the cost of laptops, phones, and other equipment you supply and associated IT and networking costs, which are especially important in this age of remote work.

 

However, in the absence of knowing every possible expense, you can take a simpler approach. Although it’s dependent on variables like industry, role, and location, some experts say that the cost of one employee is generally around 1.25 to 1.4 times the salary. Using this metric, if the base salary of an employee is $45,000, then you can expect to pay in the neighborhood of $56,250 to $63,000 for that employee when you account for the overhead. 

 

Why it’s important to understand your cost of labor

No matter how you conduct employee costing, being thorough, accurate, and up-to-date is key. Any uncertainty about your labor costs can create major gaps in visibility that affect everything from quarterly project planning to yearly revenue goals. 

 

For example, it’s far more difficult to come up with accurate cost accounting and financial projections without updated employee costs. When you plan and set goals at the beginning of the year, you need to know as the year goes on if you’re on track to hit your sales and revenue targets, or if you’re falling behind. 

 

If you do fall behind your projections, you could feel the urgency to hire more people to try to make up the difference. But if you don’t know how much each employee will cost, then you also won’t know how many you can actually afford to hire, let alone how hiring them might affect your bottom line at the end of the year.

 

The problem is that to determine true employee costs, you may have to delve into multiple and disparate systems to find information — systems that are often based on manual data entry, which decreases accuracy, or are owned by different departments who may not have the capability of easily sharing updated information with others. This makes accurate employee costing that much harder, and the possibility of overspending on labor that much higher.

 

How to drive down labor costs

To rein in spending and determine the true cost of employees, you need a single source of truth where you can find and access data in real time about each employee-related expense beyond just wages and salary, and then calculate labor costs accordingly.

 

A human capital management (HCM) platform can aggregate data across your HR department, including payroll, taxes, benefits, and other forms of compensation that impact employee costing. 

 

In particular, SyncHR HCM automates data syncing and updates across your apps and systems to help ensure timely, accurate costing data. The platform makes it easier than ever to:

  • Accurately pinpoint and calculate all employee costs

  • Make better predictions about labor demand

  • Stay up-to-date on shifting employee costs

  • Plan your workforce and determine hiring needs

  • Hire smarter and with more confidence

 

SyncHR’s user-friendly custom dashboards and reporting capabilities, give your whole organization instant, reliable visibility into all employee costs.  You can also get a quick snapshot of total employee costs in relation to your staffing and budget plans so you know if you’re on target or where adjustments need to be made. 

 

Appropriately staffing teams is a vital element of any successful organization. But hiring without having the complete picture is a recipe for costly mistakes and potential failure. 

 

SyncHR helps teams go beyond just salaries and basic employee cost metrics by providing real-time, accurate, and complete employee costing models your team needs to make more precise financial projections and budget allocations for every team or department  And with greater and more accurate insight into overhead costs, you can actually drive down your costs by making smarter, more informed decisions that support building and maintaining a competitive business culture.

 

Contact us to learn more about using your HCM platform to more accurately calculate the true cost of your employees and hire smarter. Or schedule a free, personalized demo to see it in action.  


 

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John Cuellar

John Cuellar

John is responsible for SyncHR’s product, engineering, and system operations teams. He is focused on streamlining the business processes related to HCM and finance by distributing SyncHR to all members of the workforce and by using patented security and workflow to control these developments. John is also responsible for delivering SyncHR as a cloud based application with “extreme ratio” financial metrics.

He has a background in engineering, workplace applications, and business administration, bringing over 25 years of experience deploying strategic HCM applications. Prior to co-founding SyncHR, John was the CEO of Harbor Technologies, since acquired by Mellon Financial Corporation. Previous to Harbor Technology Group, he spent an internship with the Swiss Bank Corporation in their derivatives pricing and trading group and also worked as a senior manager for the US Navy. John received his Bachelor of Science degree in Electrical Engineering from the University of California at Santa Barbara, and his Master of Business Administration from the Haas School of Business at the University of California at Berkeley.

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