Calculating the full cost of employing someone

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MikeUnwalla

  • #1
    Various web sites suggest that the full cost of employing someone is between about 40% and 100% of an employee's salary, in addition to the salary itself. They mention things such as NI and pensions, but they don't go into detail.

    I'm looking for a cost model that defines the full cost of employing someone. I want to include all possible costs, such as recruitment, employee salary and benefits, company insurances, employer taxes, training, infrastructure costs, consumables, HR overheads, software licences, maternity pay, jury service, and so on. (Obviously, costs vary by employment sector; I'm looking for costs associated with office-based work.)

    Ideally, I'd like a model that is recognised by (or defined by) professional bodies such as accountants, personnel, or even HM Government.

    All thoughts/help/ideas/pointers are welcome.
     
    miketombs

    miketombs

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    Jan 13, 2007
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  • #2
    What you're asking for would be specific to each company, so a generic model is not likely to be of much use. Also, you would need to be clear if you want to look at total costs or marginal costs, so e.g. a new employee in an office wouldn't generate additional infrastructure costs, but would still be occupying floor space on which you may be paying rental.
     
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    G

    GeorgeM

  • #3
    I don't know if this answers your question. But as a guide you should aim to increase your sales by around three times the employees salary in order to cover all the costs of finding, employing, and keeping that employee on your books.

    So if you employ someone on a salary of £12k per annum, then you should target a sales increase of £36k.

    Regards
     
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    MartCactus

    MartCactus

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    Sep 25, 2007
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  • #6
    MikeUnwalla said:
    I’m looking for a cost model that defines the full cost of employing someone. I want to include all possible costs, such as recruitment, employee salary and benefits, company insurances, employer taxes, training, infrastructure costs, consumables, HR overheads, software licences, maternity pay, jury service, and so on. (Obviously, costs vary by employment sector; I’m looking for costs associated with office-based work.)
    Click to expand...

    As others have mentioned, this is likely to vary widely for different types of business.

    For us as a software house we have software licenses, computer hardware, training etc. And then do you factor on a proportion of fixed costs (rent, heating etc)? If you don't then you aren't taking account of the fact that if you hire 50 people you'll need a new office, so you should factor in these costs per employee.

    Small company employees are more likely to be able to avoid jury service, and also has lower overheads because some govt legislation doesn't apply to companies with less than 5 employees.

    We'd typically here hope that each employee can be billed our for at least twice their salary per year (to cover overheads, plus profit)
     
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    Wiggy

    Wiggy

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    Sep 11, 2007
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  • #7
    Like Miketombs said, it would be hard to have a generic model. Too many specifics. . .In my case, my first employee added costs like liability insurance that did not increase with other employees. . .So the more employees I have the cheaper they get [policy covers first 50]
    Then, how efficient is the setup? If you run a really tight ship, your infrastructure should have just enough resource for the staff you have, so each new employee could in theory, add the cost of moving to bigger premises. . .If things are less tight, you just stick a desk in the corner. . .
    I guess there could be a generic model for starting up a business with X employees.
     
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    Astaroth

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    Aug 24, 2005
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  • #10
    The basic one that I have always known is 1.5x salary but this is only for the person themselves and not the supporting infrastructure/ facilities on top of that.

    Even within a company it isnt that simple as if you have an office that has a H&S limit of 20 people employing the 21st person is going to carry a lot more costs that employing the 20th did.
     
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    cash_saver

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    Mar 14, 2009
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  • #11
    Contracting Out Employees
    My rough rule of thumb is that if you contract out a consultant employee, in order to cover all variable and fixed expenses and make a profit, the employee should be billed out at 3.5 times his hourly rate of pay to make a profit. To just cover expenses, he needs to be billed out at 2.8 times his hourly rate of pay. This includes a calculation that the consultant can not be billing with clients 100% of the time, and covers training and time between clients. I did these calculations in detail a few years ago.

    True Hourly Cost of Employees
    I have found this simple online calculator that calculates the true cost of an employee per hour based on a fairly simple set of factors. It has default values, but change these with your own figures. It refers to out-sourcing IT Support, but it can be used with many different professions.


    itcenta .com /it-support/employee-cost-calculator

    Hope this helps
     
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    M

    Matthew_28

  • #12
    For just the person only i generally use 1.5 times their salary/hourly pay e.g. someone at £12/hour is charged out at £18/hour. Would need to be calculated more accurately depending on the type of business and benefits, resources etc, could easily be worked out in an excel spreadsheet.

    Regards
    Matt
     
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    Tom McClelland

    Tom McClelland

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    Feb 10, 2008
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  • #13
    The rule of thumb I've always worked on in the IT software and services industry is that a new employee needs to generate gross profit that is around 3x their salary.

    Basically on average you'll incur additional costs of all kinds equal to their salary bringing the total cost increase to 2x salary. Then the GP increase of 3x salary is 33% profit. (it is surprising how often people forget when doing these exercises that the purpose of the recruitment is to make a profit, not just to break even while selling more and doing more work)

    That rule applies to developers and consultants. A salesman will need a much higher multiple of salary to justify their presence, because typically their sales come with additional costs attached.
     
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    P

    profitxchange

  • #15
    Mikeunwalla
    Useful speadsheet
    I think you may have a typo? in "1" salaries 35k - 5K should it be 50k

    Re hols etc is not the min now 5.6 weeks (incl public hols)?

    As a rule of thumb I would normally use 3x basic sal. to breakeven.

    This sort of measure can be useful for measuring staff performance as they need to add at least 3 x their cost before thay add any value to the business.

    Another measure I often use to monitor performance trends is £sales/£employment costs as well as £ Profit/£ employment costs. Both should rise continually - they also highlight the impact of annual salary increments.
     
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