The Ultimate Guide to Employee Cost

If you are a business owner, manager, or HR professional, you would know that hiring and retaining employees is both a costly and crucial task. To any organisation, employees are the most valuable asset. However, they are not a one size fits all solution, with each employee having their wants, needs, expertise, and expenses that go beyond just salaries. Understanding and managing these expenses can help you optimise your budget, improve your profitability, and make better decisions for your business.

In this blog post, we will explain what makes up the cost of an employee, how to calculate them, and what strategies you can use to reduce them. We will also introduce you to Recruitery, a hiring solution that can help you find and hire top talent in Asia Pacific markets at a fraction of the cost of traditional methods.

Defining Employee Costs

 A Group of Happy Employees

Employee costs are the total amount of money that a business spends on its workforce, including direct, indirect, and hidden costs. These costs can vary depending on the industry, location, size, and type of the business, as well as the characteristics and performance of the employees.

Direct costs are the expenses that are directly related to the production or delivery of goods or services by the employees. They include:

  • Salaries or wages: This refers to the fixed or variable amount of money that employees receive for the work they have done.
  • Bonuses or commissions: This is the additional payments that employees receive based on their performance and achievements.
  • Overtime pay: Refers to the extra payments that employees receive for working beyond their regular hours.
  • Payroll taxes: This is a different cost and is basically taxes that employers have to pay to the government based on their employees’ salaries or wages. These include Social Security, Medicare, federal and state unemployment taxes, and other taxes depending on the location.
  • Benefits: Last but not least, this is the non-monetary rewards that employers provide to their employees as part of their compensation package. Benefits usually include health insurance, retirement plans, paid time off, education assistance, etc.

Indirect costs are the expenses that are not directly related to the production or delivery of goods or services by the employees, but are necessary for supporting the business operations. They may include:

  • Recruitment costs: The costs associated with finding, attracting, hiring, and onboarding new employees. These include advertising fees, job boards fees, recruitment agency fees, background checks fees, testing fees, travel expenses, relocation expenses, and training expenses.
  • Office space and equipment costs: The costs associated with providing a suitable work environment and tools for the employees. These include rent or mortgage payments, utilities bills, furniture and fixtures costs for the area the employees will be working in. Computers and software costs, phones and internet costs, maintenance and repair costs to ensure employees are able to work properly.
  • Administration costs: The costs associated with managing the human resources functions of the business. These include payroll processing fees, accounting fees, legal fees, compliance fees, HR software fees, and other overhead costs.

Hidden costs are the expenses that are not easily quantified or tracked, but can have a significant impact on the business performance and profitability. They include:

  • Turnover costs: The costs associated with losing an employee and replacing them with a new one. These include severance payments, exit interviews costs, lost productivity costs, lost knowledge and relationships costs, customer dissatisfaction costs, and trade secrets leakage costs.
  • Absenteeism costs: The costs associated with employees being absent from work due to illness, injury, personal reasons, or other factors. These include lost productivity costs, overtime pay for covering employees, temporary staff hiring costs, and medical expenses.
  • Presenteeism costs: The costs associated with employees being present at work but performing below their potential due to illness, injury, stress, burnout, or other factors. These include lost productivity costs, quality issues costs, mistakes and errors costs, and customer dissatisfaction costs.

Calculating the Total Cost of an Employee

People Calculating Employee Cost

To calculate the total cost of an employee for a given period (usually a year), you need to add up all the direct, indirect, and hidden costs associated with that employee. This can be done using a simple formula:

Total cost of an employee = Salary or wages + Bonuses or commissions + Overtime pay + Payroll taxes + Benefits + Recruitment costs + Office space and equipment costs + Administration costs + Turnover costs + Absenteeism costs + Presenteeism costs

However, this formula may not capture all the nuances and variations of different businesses and employees and should only be used as a reference. Therefore, it is advisable to use a more detailed and customised approach to calculate the employee cost based on your specific situation. You can use online calculators, spreadsheets, or other software tools to help you with this task.

Strategies for Managing Employee Costs

Room of Men Strategising

Managing employee costs is not only about reducing them, but also about optimising them to balance cost savings and productivity of your employees. This means finding the right balance between spending enough to attract, retain, and motivate your employees, while also spending wisely to avoid waste, inefficiency, and overpayment. Here are some strategies that can help you manage your employee costs effectively:

  • Optimise your hiring process: Hire the right people for the right roles at the right time. This can be done with the assistance of data analytics to identify your talent needs, market trends, and salary benchmarks. Use effective sourcing channels, screening methods, and assessment tools to find and attract qualified candidates. In the job description for potential candidates, use clear and consistent criteria, feedback mechanisms, and negotiation techniques to select and hire the best fit for your business.
  • Optimise your compensation plan: Pay your employees fairly and competitively based on their skills, experience, performance, and market value. Use a mix of fixed and variable pay components to understand the worth of your employees and reward them for their contributions and achievements. Remember to also use a variety of benefits to enhance your employees’ well-being and satisfaction. Finally, review and adjust your compensation plan regularly to keep up with the changes in the business environment and the employee expectations.
  • Optimise your employee engagement: Engage your employees in meaningful and fulfilling work that aligns with their strengths, interests, and goals. Do provide them with clear and realistic expectations, feedback, and recognition as well as opportunities for learning, development, and career growth. It is also the organisation’s responsibility to provide its employees with a positive and supportive work culture that fosters collaboration, innovation, and diversity. Lastly, do address any issues or concerns that may affect your employees’ performance or morale.
  • Optimise your employee retention: Retain your high-performing and high-potential employees by understanding their needs, preferences, and motivations. Provide them with challenging and rewarding work assignments that match their aspirations and capabilities and provide them with a clear and compelling career path that offers them advancement and development opportunities to increase retainability.

Hiring Solutions by Recruitery to Help Reduce Employee Costs

Recruitery LogoIf you are looking for a hiring solution that can help you reduce your employee costs while finding and hiring top talent in Asia Pacific markets, you should consider Recruitery.

Recruitery is a headhunting and payroll solution that helps you with recruiting, hiring, paying, and managing payroll, tax, and compliance globally. Recruitery offers you the following benefits:

  • Access to a network of over 10,000 professional headhunters who can source, screen, and refer qualified candidates for your roles in various industries and locations.
  • Access to a local employment platform that can legally employ, pay, and manage your remote employees in India, Vietnam, Indonesia, Singapore, and other countries without setting up a local entity or dealing with complex regulations.
  • Access to a comprehensive employment package that includes local payroll support, insurance, benefits, contracts, tax filings, and in-country expertise.
  • Access to a user-friendly dashboard that allows you to manage your hiring and payroll processes in one place, with automated payslips, invoices, reports, and analytics.

Recruitery can help you save time, money, and hassle while expanding your talent pool, improving your hiring quality, and enhancing your employer brand.

Employees Make Your Business Go Around

Employee costs are an essential part of running a successful business, but they can also be a major challenge if not managed properly. By understanding what employee costs are, how to calculate them, and what strategies to use to optimise them, you can make better decisions for your business and your employees.

If you are looking for a hiring solution that can help you reduce your employee costs while finding and hiring top talent in Asia Pacific markets, you should check out Recruitery, a headhunting and payroll solution that helps you with recruiting, hiring, paying, and managing payroll, tax, and compliance globally.

To learn more about Recruitery and how it can help you with your hiring needs, do visit our website to contact us today, we are more than happy to entertain any types of questions!