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Understanding the True Cost of Employees


If you ask any of your employees what their pay is, they will quite naturally reply by stating their hourly rate or annual salary. If you ask these employees what they are costing you as their employer, most would give you the same response.


This limited view of compensation can lead to some employees asking for frequent raises or even create dissatisfaction amongst employees.


That’s why it’s so important to understand the comprehensive costs associated with employees, and even to share those costs with employees themselves if appropriate.


Some employers have used the exercise below as a way to calculate the annual and hourly cost for each position. This information can be shared with each employee during their annual wage or salary review to inform them of the actual cost (or total value) of their position to the company and give them a more comprehensive look at the value of their employment package.


It may be argued that some of the listed expenses should be considered as overhead. And some are, in a true accounting sense. The point of this exercise is to uncover the total cost of the package provided to employees and to more accurately measure productivity.


The chart below isn’t all-inclusive. Not all apply to every employer, and you may need to add additional items depending on your situation.


Note: The yearly financial statement should be the source of the data for annual employee costs. Divide each annual cost by 2,080 hours (assuming 40 hours per week and 52 weeks per year) to calculate the hourly cost.


Having this information at your fingertips can be a powerful tool when calculating your Key Performance Indicators, and KPIs are very important for your business’ success. To learn why they’re so important and how to use them properly, check out our free report: Why KPIs are Key to Your Success.