Payroll is commonly the highest business expense, and compensation is far from being a cut and dry number. There are so many factors that go into calculating the actual cost of each and every employee. So, that $30,000 salary might be more in the realm of $44,000+ in total costs to the organization. As the highest and most impactful expense in business, it’s vital for leaders to have a true understanding of the real price tag on your workforce.
Compensation is More Than Salary
When employers take the step to hire, they have to have a clear understanding of the actual cost associated with hiring, beyond just the salary. CNNMoney.com recently released an article on the additional costs of hiring. The article revealed that there are about $18,000 worth of additional costs to the employer for a $70,000 salary. The costs add up quickly. Here’s the breakdown of their study:
- Social Security Tax: $4,340
- Medicare Tax: $1,015
- State Unemployment Insurance: $478
- Healthcare Insurance Benefits: $10,119
- 401(k) Benefits: $1,750
While not all of these expenses are required, employers have to keep things like 401(k) options for instance, in mind to create competitive compensation packages. Then there are costs associated with expansion, employee wellness programs benefits/perks and more.
“How much does an employee really cost? While that depends on benefits -- and several layers of taxes -- it typically ends up being 18% to 26% more than a worker's base salary. It can be even higher for larger companies." - Jose Pagilery (@Jose_Pagliery)
Training Isn’t Free
A position should never have a standard salary associated with it for several reasons, but the most significant would be the factor of training costs. Training can get costly, so it should be assessed, calculated and pulled into the compensation package creation. For instance, if you know a candidate will require significant training, it would be optimal to start them off at a lower salary to offset the costs, with the understanding their pay will increase once productivity is maximized.
Especially given what we know about hiring for cultural fit, it can very often make more sense to hire the candidate with strong soft skills, and train for the hard skills. This could be a contributing factor in the sharp increase of corporate training spend we’re seeing. According to a Bersin by Deloitte study overall spending by businesses on workplace training and development increased by 12% on average last year.
Talent Supply & Demand Shift
One of the most influential factors in crafting fair and attractive compensation packages is to have a strong knowledge of the supply and demand of your candidate skills and experience. In order to be strategic about your hiring choices, you must take into account the variables that affect future supply and demand. Those variables can include expansion, new products lines and limited access to qualified talent.
This knowledge will make workforce planning simpler, because you will know where and when talent gaps or droughts will pop up. Talent needs can be addressed proactively, and competitive compensation packages can be created confidently for those hard to recruit positions.
“Employers have myriad options when it comes to designing a compensation plan, and they must consider and how it will fit into their overall strategy for recruiting and retaining employees. Many employers base their decisions on the market—that is, they look at salary surveys to see what other employers are paying (external equity). Once they access the market data, they set their wages and salaries at some point above, below, or equal to the market data depending on the circumstances. For example, some employers decide that they will set wages for certain positions at well above the market rate to attract and retain highly valuable employees.” - BLR.com
When employers consider hiring, they have to have a clear understanding of the true cost. Hiring and compensation don’t happen in a vacuum; there are several functions and departments to consider. Yet another fantastic case for inter-departmental transparency in the workforce.
Want to know more about how you can breakdown silos for increased efficiency and workforce planning? Check out our complete series on the talent lifecycle.
Andre is the CEO and co-founder of ClearCompany. Prior to ClearCompany, Andre was Global Managing Director at Thomson Reuters, where he ran a 1Bn global business across 90 countries. Prior to Thomson Reuters, Andre was responsible for product development and operations at CCBN, a company he helped grow from a small start-up to number 36 on the INC 500.