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Determining the Costs of Adding New Employees

Determining the cost of adding a new team member entails more than just the “sticker cost” of initial salary negotiations. All employees incur costs, and if you understand how much it will take to hire a new member of your team, you can efficiently budget your expenses while bringing top talent to your organization.

Salary

Hiring a new employee is a costly endeavor for all organizations, be it Employee #2 or Employee #22,000. For any growing business, it is a challenge to balance the expense of paying a competitive salary versus the business growth and opportunity afforded by new hands.

While negotiating salary can be the most straightforward cost of adding a new employee to determine, determining the exact market rate of a position is no easy science. In addition to setting salary bands for similar roles, employers have to weigh decisions such as whether a worker is paid an hourly wage or an annual salary, or if they are eligible for overtime.

Recruitment expenses

The costs of onboarding can be as high as $4,000 according to Glassdoor. These hidden costs include onboarding paperwork and administrative time, higher turnover of new hires, and the delayed productivity of existing employees who spend valuable hours on training.

While larger organizations realize certain cost efficiencies from establishing and optimizing dedicated recruitment strategies, small businesses also stand to benefit from smart recruiting. Targeting qualified candidates with specialized industry experience translates to higher upfront costs, especially when headhunters or external recruiter agencies are utilized. However, investing in proven talent typically lowers spending on future training and development, so it is important to find the right balance when taking on new candidates.

Employment taxes

You are probably aware that employers are responsible for withholding and/or contributing a variety of federal taxes, including income tax, social security, Medicare and federal unemployment tax. These taxes can add up to an additional payment of roughly 7.5 percent of employee wages. Tax advice should always be handled by a professional, but the IRS website provides an excellent resource for understanding the basic requirements.

In addition to the actual tax withholdings required by law, you should consider the administrative costs of properly recording, filing and reporting employment taxes. Whether an additional internal human resources specialist or an external workforce management company is required, do not forget the cost of doing business with the taxman.

Benefits

To attract top talent, workplaces need to offer additional benefits outside of salary as part of the total employee compensation package. Employer matches and contributions toward retirement savings plans such as a 401(K) combined with medical plan deductibles are probably two of the most common and expensive benefits that companies pay. Other common benefits include short-term and long-term disability, life insurance, dental plans, tuition reimbursement and more.

How much then is the right amount that your organization should allocate toward employee benefits? According to a rule of thumb from MIT Sloan School of Management Senior Lecturer Joe Hadzima, employee benefits typically range from an additional 25 percent to 40 percent of salary. However, organizations that spend more on providing top employee benefits also gain an intangible benefit from improved worker satisfaction and retention rates.

Equipment and facilities

As talented and knowledgeable as your new hires should be, they will still need the right tools to get the job done. No business in today’s digital environment can escape without investing in new technology. Technology is expensive and growing rapidly, meaning businesses must make recurring investments in upgrading their platforms. A laptop and a phone combination is the bare necessity for most workers in terms of physical hardware, but this technology will only begin to scrape the surface at many organizations. For example, allocating software licenses can be a particularly painful process of a CFO or CTO’s annual budgeting forecast.

Despite the trend toward remote workplaces, modern employees need not just the tools for the job, but also a place to work. Unsurprisingly, office space in major metropolitan areas is the most costly, topping more than $10,000 annually per worker in New York, San Francisco, and Washington, D.C., for a modest 200 square feet per employee. Of course, the exact facilities and equipment needed, and more importantly, the hit to your bottom line will vary widely based on the industry, location and size of your organization.

Training

Studies support the notion of a productivity curve, where the break-even point of a new hire in a mid-level managerial role is 6.2 months. Particularly for new entrants to the workforce fresh out of school or breaking into a new industry, there will likely be an even higher opportunity cost of the time spent training, both for the trainer and the trainee.

Employee development is another essential expense highly regarded by both prospective and current employees. Course and study materials for professional certifications and examinations, travel reimbursements for attending work conferences, or internal skill development platforms represent a bonus to employees and a price tag to employers. Again, investing resources in your team or organization is highly encouraged, but be sure to consider the total cost of all operational decisions.

Once you know how much your next employee will cost, instead of waiting until you have the cash on hand, consider leveraging alternative financing options such as Reliant Funding to get your new employee onboarded and making your business money as soon as possible.

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