The True Cost of an Employee

The True Cost of an Employee

If you just started a business or you are looking to expand and want to employ someone new, it is easy to assume that the total employee cost is the salary. It is a common pitfall for business owners to fail to account the true cost of the labour they employ, leading to errors that eat away at their bottom line. This article will help you identify the critical areas which amount to the true cost of an employee which should help you make more informed decisions in the future.

Things to Consider When Employing Staff

Basic Salary

The basic salary is a major component of the employee’s cost to your business. It is the monthly amount you will pay whether they are on vacation or have a sick day, even if you are engaging the person at the minimum wage (which is 16.87 dollars in Australia).


Employees are guaranteed certain benefits, such as healthcare, company vehicles or transport allowances, maternity leave with pay etc., all of which add a percentage to the basic salary. A report by Deltek gives the value of fringe benefits at 35% of the basic salary. This does not apply where you have outsourced some jobs to offshore outsourcing firms for instance.

Retirement Bonuses and Pensions

Bonuses are added to wages on a seasonal basis, especially as a reward for good performance by the individual worker. Other types of bonuses include profit sharing, pensions, and severance packages.

Overhead and Administrative Costs

Often identified as hidden costs, as they are not exactly paid to the employee but are used for the employee, these refer to the costs of office equipment and supplies, hosting, data communication and other internet services, phone services, and even the cost of supervision of personnel associated with that employee. These amounts often make up 25% of the employee’s salary.

Recruitment Costs

You may incur recruitment costs either by engaging a recruitment agency, or utilizing your own internal resources. Additionally, advertising fees, time spent interviewing and signing bonuses are all part of recruiting.

Office Space

Renting real estate to accommodate employee growth is a significant cost.


Training and monitoring the new employee, getting them to adapt and understand the firm’s policy, falls under the employee cost.

The Right Answer

Before embarking on your next hire, consider how necessary it is for the employee to be in the same location as you. Ask these questions:

  • Does this person’s job involve zero face-to-face contact with my clients?
  • Could this work be done effectively in another location, as long as someone is managing them?
  • Could my bottom line benefit from considerably lower cost employees?
  • Would it be useful to have someone else worry about all the pastoral care and management of this staff, so I can just focus on outcomes?

If you answered “Yes” to any of these questions – contact us to find out how we can help with your next hire!

About the Author: Michelle Fiegehen is the CEO of Yempo, a boutique offshoring company in three locations in the Philippines. Now a permanent resident of the Philippines, she has lived and worked in the Philippines and India since 2009, building offshore capability for clients in Australia, United States, Canada, United Kingdom, Singapore, Dubai, South Africa and Hong Kong.

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