In this video, Marcus Dillon, CPA and Client CFO, discusses the additional costs beyond base pay an owner needs to consider when hiring a new employee. The blog below expands on the ideas mentioned in the video and how bringing new talent on board impacts your organization's bottom line.
Counting the Costs of Hiring a New Employee
Hiring new employees can be a transformative experience for any organization. It brings fresh talent, innovative ideas, and expanded capacity. However, this transformative process comes at a cost that extends beyond just the employee's salary. An accepted rule of thumb is that the cost of an additional employee is actually 1.25 to 1.4 times their salary depending on certain variables. Some of the added costs listed below are required and others are at the discretion of the individual business.
• Salary and Wages: This is the most obvious cost and includes the employee's base salary or hourly wage. Don’t forget to factor in bonuses, commissions, and overtime pay.
• Benefits: Employee benefits can be a significant cost, including health insurance, dental insurance, retirement contributions (e.g., 401(k)), life insurance, disability insurance, and other perks such as gym memberships or wellness programs.
• Taxes: Employers are responsible for payroll taxes, including Social Security, Medicare, and unemployment taxes. These taxes can add a substantial cost to each employee's compensation.
• Training and Onboarding: You may need to invest in training and onboarding programs to get new employees up to speed. This can include the cost of materials, trainers' salaries, and the time of existing employees who assist with onboarding.
• Equipment and Supplies: Some positions may require specific equipment, tools, or supplies. For example, a software developer may need a computer with specialized software, and a construction worker may require safety gear and tools.
• Workspace: The cost of providing a workspace, including rent, utilities, furniture, and office supplies, can be a significant expense.
• Employee Engagement and Retention: Ongoing efforts to engage and retain employees can include perks like employee recognition programs, team-building events, and career development opportunities.
• Compliance and Legal Costs: Ensuring that your employment practices comply with labor laws and regulations may require legal counsel or the implementation of HR software and systems.
• Employee Turnover Costs: When an employee leaves, there are associated costs to be mindful of including:
- Productivity Loss: It takes time for a replacement to become fully productive. On average, it can take between three to eight months for a new employee to get up to speed.
- Recruitment Costs: When an employee leaves, there are additional costs associated with recruiting, including advertising, interviewing, and background checks.
- Cultural Impact: Losing an employee can negatively impact workplace morale and company culture. Whether employees have become friends, spent time training, or now have to take on a heavier workload for a time period, the entire team is impacted when there is turnover.
It's essential to carefully calculate and budget for these hidden costs to ensure that hiring a new employee is financially sustainable for your small business. Additionally, consider the long-term impact of hiring decisions on your company's growth and profitability.
Dillon Business Advisors Teams of 3 specialize in leading the conversation about these costs and timing of hiring additional employees with our small business owners. Our team of financial accounting experts and CPAs would love to lead the conversation on new opportunities for the future of your business. Contact us today.
