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Fully-Baked: The real cost of adding a new employee

From My High Tech Startup

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It’s not too early for some in the media to start speculating that the recession is already over thanks to a few good days in the stock market (thanks CNN).  So, next up, job opportunities for some of our best and brightest startups, right?  Not so fast, unfortunately (thanks Congressional Budget Office).  But those rays of hope may mean light at the end of the tunnel — companies will be looking to hire again (sometime) and others will start looking to bring on consultants.

For that reason, it may be time for companies to start considering the costs of adding a new employee and thinking about strategic hires sometime in the near future (perhaps there is a talented individual who was laid off from another company that might be a perfect fit).  What some new managers fail to recognize is that the cost of the employee are more than just their salary (and even more than salary and benefits).  Think laptops, rental space (if you need office space), lunches, taxes, training, travel, and everything else that goes into an employee.

There is no set number on the full cost of an employee and in fact it usually depends on the job itself and what types of “add ons” the company offers.  But estimates range from 1.5x to 3x of salary for the ‘fully-baked’ cost of an employee — the cost including things like benefits, taxes, equipment, training, rent, etc.  While bringing on an employee may only cost you $30,000 in salary, depending on the other costs, this could actually result in additional costs to the business of $90,000.

So how can you determine the true “fully-baked” cost of an employee?

The cost to add each new employee represents more than just the salary you’ve agreed to in the offer letter. You’ll be responsible for costs from taxes and benefits to rent and equipment.

The Department of Labor provides information on the costs an average employee costs to the employer (these don’t factor in things like equipment costs, rental costs, or other costs not directly tracked by the DOL). According to the DOL, an average employee costs $25.93 per hour when you factor in costs of salaries, benefits, and taxes. While these figures represent useful information, you should note that these numbers represent a broad range of employees across all industries in the U.S. economy.

Private Industry Employer Compensation Costs

U.S. Department of Labor’s Bureau of Labor Statistics (June 2007)

Employer Cost

Cost per Hour

% of Total Costs

Wages and Salaries

$18.32

70%

Paid Leave Benefits #

1.77

7%

Supplemental Pay

0.78

3%

Insurance Benefits

1.97

8%

Retirement and Savings

0.88

3%

Legally Required Benefits *

2.21

9%

Total

$25.93

100%

Employer Costs of an EmployeeEmployer Costs of an Employee

Paid leave benefits includes vacations, holidays, sick leave, and other leave.

* Legally required benefits include Social Security, Medicare, unemployment insurance, and workers’ compensation.

So while the Department of Labor information represents aggregate data, the information can be quite helpful to gauge what it will really cost to hire another employee. If you’d like to estimate the real cost of adding a new employee, you may consider multiplying the employee’s base salary by a multiplier that would reflect their salary, benefits, rent, equipment, training, and other general expenses associated with another team member.

For instance, looking at the chart below, you could see that if you planned to add two programmers at salaries of $50,000 each and one manager at a salary of $100,000 for the following year, you could be looking at an increase of expenses of up to $540,000. When making your budget to add headcount, it is important to include costs associated with the employee in addition to their salaries. This is just a helpful “big picture” tool and each company will likely need to adjust its calculations to fit its own operations, however it is helpful in gaining a quick sense of the true costs associated with increasing headcount.

As you consider whether to bring on a consultant or hire a new employee, be sure to compare apples to apples — which usually means the full-baked employee costs versus the consultant’s rate.  There are oftentimes other “benefits” to hiring an employee over a consultant (perhaps a greater sense of loyalty).

There are rays of hope out there — some companies (hopefully yours) is looking to hire.  Plan ahead for the cost of an employee to be sure your hires don’t break the bank.

Employee Cost Multiplier

Salary of $50K

Salary of $100K

Salary

1.0

$50,000

$100,000

Benefits

0.2 – 0.4

$10,000 – 20,000

$20,000 – 40,000

Rent, Equipment, Training, Etc.

0.5 – 1.3

$25,000 – 65,000

$50,000 – 130,000

Total

1.7 – 2.7

$85,000 – 135,000

$170,000 – 270,000

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