Attempting to determine the exact cost of a new employee is a complicated process. It isn’t as simple as completing salary negotiations, and even including the cost of training and benefits doesn’t fully encompass the actual cost. So how do you determine the overall cost of an employee?
To start determining the total price tag of a new employee, you must add the cost of benefits and taxes to the employee’s wage. Then it is important to consider how your business’s overhead will change.
“Some owners neglect to calculate overhead, but it belongs in there because employees use up soap and toilet paper, steal office supplies, require heat and air conditioning, and take up space,” says author and business coach Dan S. Kennedy. “If it costs this hypothetical business owner $2,000 a month for their space, utilities and supplies, and they have four employees, that’s $500 each divided by 160 work hours, or $3.12 an hour.”
It is also necessary to consider the cost of lost productivity while the new employee gets up to full speed. New employees also tend to make more mistakes than veterans, which should be factored in. The impact of these mistakes depends upon your business and the specific role the employee will play. Mistakes in customer service, for example, can drive away customers who would have provided income for years. On the other hand, a new waitress’s mixing up a drink order is easily and inexpensively remedied.
“Obviously, this cost varies by business, by employee and by employer. No formula for calculating it exists that I know of,” states Kennedy. “But for the sake of this hypothetical example, let’s conservatively say that our pretty good hypothetical employee costs us about $400 a week from waste, mistakes and outright theft. Divide that by 40 hours, and add $10 an hour to the employee’s cost.”
Furthermore, you need to consider the lost productivity of your own hours. If you are interviewing, training or overseeing a new employee, you are spending time that could have been used doing something else. Each new hire will take a different amount of time, making it complicated to anticipate the total cost of your lost hours.
If you have just started your business and are hiring your first employee, it is important to note that the cost you incur will be higher than that associated with subsequent employees.
“The contrast between hiring just the one employee and hiring when you’re a larger company is striking,” states Jason Hesse, a Forbes contributor. “Companies get, in other words, more efficient with size.”
Understanding this trend can help ease the anxiety you may feel when you first tackle hiring. Once payroll, insurance and other human resource infrastructures are in place for the first employee, it is easier to add more.
So, in order to stay on top of your business’s expenses, keep these considerations in mind when hiring or firing employees.