What does an employee cost?

When it comes to running your business, you know better than anyone it takes money to make money. You make conscious decisions every day on where to best invest your dollars to ensure your business moves forward. But what does an employee cost…how much do you actually pay to have someone’s butt on a seat in your office?

One simple response might be that it costs whatever you pay them.

Take an employee on an annual salary of $50,000 for example. Annual salary divided by weeks of the year (52) divided by hours per week (38):

• $50,000/52 = $961.54 per week
• $961.54/38 = $25.30 per hour

Numbers right? Yes. Accurate employee cost? No.

Here’s some factors you should consider when it comes to getting a more realistic costing on each person:

• Superannuation
• Payroll tax
• Workers compensation
• Sick leave (up to 10 days per year)
• Annual leave (20 working days per year)
• Working weeks per year (and it’s not 52)
• Public holidays (average of 13 days per year)
• Payroll administrative costs

If you want to drill down you might also factor in your costs associated with hiring and onboarding, training and professional development, office space, workstations, office equipment and staff amenities.

So what’s the bottom line on the cost of an employee? Typically, a minimum of 1.5 times the employee’s annual salary. Which means your $50,000 employee actually costs you $75,000 and your original hourly rate of $25.30 is closer to $38.00. Just to have that person there.

Now let’s see why knowing an accurate costing is important…

Calculating your costs accurately gives you a true reflection of your actual employment outlay, stopping you from running into potential cash flow problems down the track. It also allows you to consider what HR measures you put into place in managing your non-performing employees to maximise your return on investment.

First step? Look at each of your employees and ask a critical question: which of them actually brings in 1.5 times their salary in revenue to cover your costs or, for non-revenue generating roles (like administration), which ones contribute 1.5 times their salary in cost savings or efficiencies?

Step 2: find someone with genuine experience in HR and a track record of helping businesses like yours maximise employee engagement and productivity. Then ask some smart questions. You’re already spending enough on employees.