Understanding the Cost of Employee Benefits

Every business knows that there is more to employee costs than the cost of their raw wages. By understanding how to calculate the cost of employee benefits then you are better able to make effective management decisions. In order to calculate the cost of employee benefits, you also need to understand the benefit that these costs bring to your firm.

The Cost of Employee Benefits

Imagine you hire someone for $50,000 a year on a full-time basis.

On a simple front, the cost to you is $962 a week, or about $24.04 an hour for a 40 hour week for their work. However, it’s really not that simple. To get a true understanding of their cost you really need to work out how much you are paying them per productive hour of work.

This means working out the total cost divided by the number of productive hours to understand the true hourly rate.

Other costs include:

1. Superannuation

Superannuation is a compulsory employee benefit that is easy to work out.

Using our above example, at 9% of the base wages, superannuation is $4,500 a year. This brings our annual wages to cost up to $54,500.

2. Leave

Leave is an employee benefit that ensures your staff obtains essential breaks. Since leave reduces the hours that an employee is available to work, it essentially drives up the hourly cost of an employee since we want to know what it costs per productive hour.

Employees are entitled to:

4 weeks annual leave (25 days)

Personal/sick leave of 10 days

Public holidays, of which there are approximately 13 days, depending on your state

In the year that you are paying them $54,500, there are 261 work days. If we remove the leave days we are left with 213 days.

Total wages cost for the year = $54,500 divided by 213 work days = $255.87 per day.

$255.87 per day divided by 8 hours equals $31.98 per hour.

You can already see at this point that the productive work an employee provides to your business costs a lot more than their raw hourly wage.

If you pay to leave loading or offer additional leave days then you need to add these factors into the equation.

3. Insurance

Compulsory Worker’s Compensation can cost over 15% of the cost of your total wages, depending on your industry. Say we assume a 2% rate, that brings your hourly cost to $32.62.

4. Other variables

There are a lot of other variables that further add to this cost. These can include:

Financial Costs:

• The cost of recruitment
• Payroll tax (if you have a high amount of wages)
• Staff amenities
• Office space overheads or reimbursements for home costs
• Bonuses, incentives or gifts
• Refreshments
• Office supplies and equipment
• Staff social events
• Work phones, laptops or other equipment staff can take home
• Providing child care for employees
• Covering an employee’s medical costs

Some businesses try to minimise these extra costs by including many of them as part of the employee’s salary package instead of paying for them as additional business expenses. However, often it is worth paying for these small costs on top of the employee’s normal salary, in order to improve the value of your staff members as loyal and effective employees. (We’ll come back to this point).

Benefits that reduce productive hours and increase financial costs:

• Training and education updates
• Travel costs and downtime for travel
• Staff events and meetings

Since these costs and time demands can be extremely variable, it is best to work with your accountant to understand what yours are.

As you can see, the effective hourly cost of an employee could easily be double the raw cost of their wages alone.

Once you understand how to calculate the cost of an employee you are better equipped to make business decisions such as hiring decisions, pricing strategies, marketing plans, and staff performance expectations or KPIs.

The Cost of Employees Is An Asset To Your Business

If you stop your calculations at the raw dollar figure, then you’re missing the point of employees. An employee is in your business because they add value. They are doing work that you can’t do on your own. They are creating the product or service that your business sells. Customers benefit from that personal touch that your employees provide.

An employee’s cost is really a part of the product or service that you are selling. That’s exactly why you need to know their productive hourly cost to you since this cost needs to be covered by the values of the sales they are helping to generate.

The Value Of Additional Employee Benefits

It’s not just a matter of knowing the raw cost of employees. You also need to understand the value that an employee has in your business and how providing employee benefits can actually improve their value. Calculating the cost and value of employee benefits can be tricky.

The more valued an employee feels, the more likely they are to work effectively and remain loyal to the business. Employees who are better-taken care will be able to focus more effectively and are more likely to work efficiently. You may be able to measure this by surveying employee attitudes and correlating these to differences in meeting sales targets.

Reduced staff turnover will save you from recruitment costs, doubling up of employees during handover, training, etc. While this one is easier to calculate, since you can draw the raw numbers of staff turnover and the actual financial cost of recruitment and training, there is also the downtime to factor in of new staff getting used to their role.

When you understand the actual cost of an employee, as well as the fact that they are a benefit to your business (all going well!), then you are better equipped to consider and make decisions on additional employee benefits.

At the end of the day, it is worth investing in additional employee benefits if the additional cost is less than the additional value these benefits create.