Figuring Out the Real Financial Impact of an Employee
When it comes to expanding your team, the cost of each new hire is not just about their base salary. In reality, it could be around $62,500-$70,000. Calculating the cost per employee involves tallying their total compensation, benefits package, taxes, and other related expenses. To make shrewd hiring decisions, it's vital for your HR team to understand these costs.
Understanding employee costs changes your perspective on productivity and retention. The following guide breaks down everything you need to know about employee costs, from hidden costs to the ways to cut back on expenses.
How to estimate employee costs
The cost of an employee is typically 1.25 to 1.4 times their salary. This figure varies depending on the business owner's benefits, overhead costs, and the number of employees. According to the Bureau of Labor, in 2021, the average salary cost for private industry team members was an average of $26.86 per hour worked. Benefits averaged about $11.22.
Factors affecting employee costs
Recruitment and hiring costs
Retirement (2.5% of salary)
In this economy, you'll likely need to spend on recruitment to attract the right talents. According to SHRM, hiring a new employee can cost over $4,000. This total includes job board fees, recruiter fees, internal HR time, background checks, and drug tests.
$1,390.70
Onboarding and training costs
Onboarding costs vary, but they can be significant for many employers. In-office teams may need to purchase new software, equipment, or uniforms for their new hires. Training is also an essential expense. Establishing a solid onboarding program can help regulate these costs.
Health care (average cost in Ohio)
Wages
$201.00
Base salary is the most obvious item on the list. The national average wage in the US was $55,628 in 2020, but this varies depending on the employee's location, experience, and job duties. Overtime and bonuses are additional factors to consider.
Benefits
FICA (7.6% of base salary)
Benefits are a significant portion of employee compensation packages. These may include retirement plans, health care, and paid time off. Benefits matter when planning your budget, but they're within your control. Tweaking your benefits package can help you save money while staying competitive with other employers.
$4,227.70
Hidden employee costs
Productivity losses
FUTA (6% of first $7,000)
New hires take time to get up to speed. During this period, your company's return on investment is limited.
$420.00
Turnover costs
High turnover can cost a business more than $15,000 per employee lost, factoring in lost productivity and the costs of finding a replacement.
SUTA (2.7% of base salary)
Onboarding inefficiencies
$1,501.90
Ineffective onboarding programs can lead to reduced retention and higher costs due to repeatedly training replacements.
How to minimize hidden costs
Worker's compensation ($0.74 for each $100 of base salary)
Structured onboarding programs
$411.60
Strong onboarding programs improve new hire retention and engagement. Structured sessions focusing on role-specific training and cultural integration can fast-track productivity and increase success.
Onboarding buddies and regular check-ins
Total employee cost
Assigning onboarding buddies and conducting regular check-ins in the first 30 days helps early problem detection and aids smoother adaptation.
$63,781.50
Leveraging digital tools
Automating paperwork and streamlining routine tasks via digital platforms can reduce administrative burden, freeing new hires to focus on learning and contributing.
Investing in quality recruitment practices
Experienced recruiters or agencies can save your internal teams time and money by improving candidate fit, lowering turnover risks, and reducing time-to-hire.
Measuring and optimizing
Track onboarding metrics like retention rates, time-to-productivity, and employee engagement to continually refine hiring and onboarding processes for increased efficiency and cost reduction.
By being aware of all the components contributing to employee costs and taking steps to minimize unnecessary expenses, you can maintain a cost-effective workforce and improve the long-term success of your business. For more insights on optimizing employee costs, subscribe to the Hubstaff blog.
Enrichment Data:
Hidden costs associated with hiring and onboarding new employees often include various factors beyond just salary and benefits, such as recruiting expenses, productivity losses, turnover risks, and inefficiencies in training and onboarding processes.
The average hidden costs of hiring and onboarding encompass:
- Recruiting costs (job advertising, staff time for interviews, background checks, assessments, and sometimes recruiter fees)
- Training costs (training proper for roles and cultural integration, amounting to about $98 billion in 2023-2024)
- Productivity losses (new employees typically take around six months to become fully productive, resulting in limited return on investment)
- Turnover costs (poor onboarding can increase first-year turnover by 50%, with each failed hire costing about 21% of their annual salary, leading to average costs of $15,000 per employee lost)
- Onboarding inefficiencies (effective onboarding processes can help reduce losses of up to $1 million annually due to lower retention and engagement and time spent training replacements)
- Operational and software costs (recruitment software, applicant tracking systems, job board subscriptions, and temporary employees during hiring ramps)
To minimize these hidden costs, employers can implement structured onboarding, use onboarding buddies and regular check-ins, invest in quality recruitment practices, and support remote workers, among other approaches. By addressing these factors, companies can lower the hidden costs of hiring and onboarding, boosting the ROI on new employees and fostering long-term workforce stability.
- In addition to salary and benefits, other costs associated with hiring and onboarding new employees can include recruitment expenses, productivity losses, turnover risks, and inefficiencies in training and onboarding processes.
- Effective onboarding programs can help reduce losses of up to $1 million annually due to lower retention and engagement and time spent training replacements.
- Investing in quality recruitment practices, such as experienced recruiters or agencies, can save internal teams time and money by improving candidate fit and lowering turnover risks.
- For more insights on optimizing employee costs and reducing hidden costs, subscribe to the Hubstaff blog for valuable resources on business, personal-finance, wealth-management, and time tracking.
