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Monday, July 3, 2006

Employee loaded costs



One of the things that always amazes me is how ill-informed employees are of their 'total cost to the company', often referred to as 'loaded costs'. Simply put, the pre-tax salary that is in your offer letter is only a part of what your employer pays for you. I find it pretty silly that an employee leaves one company for a 5% pay hike in his base salary without calcuating what other 'hidden' costs may not be paid by the new employer. To give you an idea, here is a sample break down of what constitues your 'loaded cost' to your employer, assuming your salary is $100,000 (easy number for computations). There are some approximations made, but for the most part, this will give you a good idea of the costs involved.

This also gives employers an idea of how much they are really spending per employee. Many senior employees who are involved in budgeting and planning are often clueless about their real costs and take only 'paper salary' as their total cost, which is way off the mark.

Assumptions:
  • # of employees = 40
  • 2 VPs, 4 Directors, 3 sales (typically this is more, but let us take this model to compute S&G costs)
Employee loaded costs:
  • Base - $100,000
  • Timeoff/leave - $5,555.56 (assuming 15 days PTO)
  • Company Mandatory contribution to benefits: $4,000
  • trainings costs per employee per yr: $4,000
  • HR Costs (including recruitment): $1,500
  • Employer taxes on behalf of employee: $6,813 (FUTA, FICA, Medicare etc.)
  • Office space and general expenses (rent apportioned, stationery, phone, employee travel ,etc.) - $13,020
  • Company Benefits contribution - $28,000 (insurance taxes, medicare, health premiums)
  • Payroll related expenses - $10,000
  • S&G per employee - $42,237.50 (cost of sales)
Summing all of the above, loaded cost = $215,126 (approx) for an employee who's pre-taxable income is $100,000.

5 comments:

  1. hmm great post . but don't you think the cost benifit analysis still favours the organization more than individual . intodays times of outsourcing to india it is still a big win for companies

    all these expenses are chicken feeds

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  2. My take on this is that all organizations are structured in a way that overall gain to the company is more than the sum of individual employee gains. That is the only way a company can continue to scale up. Outsourcing to India is surely a great benefit to companies, but only if it is done right. There are a few big hidden costs to outsourcing, that could result in a losing proposition if not done right:

    a) Productivity - on average, the productivity of an Indian employee is less than the productivity of a US employee. Therefore, a 1:1 outsourcing of team structure never happens

    b) Management and travel costs - the cost of managing a remote project is daunting in terms of setting up the right communication channels as well as the right amount of face-time to ensure that what is being delivered is really what is required

    Finally, I am not sure I understood your comment on the expenses being chicken feed - which one ?

    ReplyDelete
  3. tch tch ARC! seems the rarefied air of the upper atmosphere is intoxicating indeed!!!

    this post seems just too unabashedly biased towards a top-down birds-eye-view without actually looking too closely at the ground reality or the worms eye view.

    If a employee can leave a job for a 5% salary hike when the employee's cost to the company is more than his total salary; then what does that say of the company's ability to retain employees ?

    What does that say about the company's willingness to listen to what's happening on the ground and the reasons for empployees leaving?

    Often employees leave when they want to turn their back on immature/bully managers-- and if the cost of a few employees leaving can give a company feedback on the ground reality--- then I think it's a net gain for the company rather than a loss...
    and if it can tell the company something about the cost of human capital beyond a employee's salary; all the better.

    ReplyDelete
  4. Actually, this post has nothing to do with saying that retaining an employee does not matter, not does it say that because the company is paying twice your paid salary, it is therefore doing a great job at retaining. So all that you say are right on - but are neither the focus not the address of my post.

    What the post is focusing on is the real cost of an employee to an employer. This is useful for any manager to know if you are creating a budget and loading on a company.

    It also affects an employee, who is leaving and is cluless about the benefits savings. Consider this: Someone gets a salary of $50,000 today in the US. He leaves for $55,000 salary, but does not realize that in the new company, his 401k deductible is $1000 instead of $100 in the previous company. His cap on personal expenditure on illness in the new company is $7000 while it was $1000 in the old company. IF he falls sick, and needs surgery, his $5,000 salary increase will cost him much more. Or consider for example, that the old company has a 401k plan that offers 3000 mutual funds, including index funds, and their employees make an annual return of 12-37% in market, compared to the new plan, that only has 12 funds, non index, which makes a return of 8% per year. The new company may not have access to these funds, since they are smaller, or, paying lesser for 401k to the 401k administrator as compared to your old company, and therefore does not qualify.

    Beyond all this, if an employee decides to leave, you may well be right that the company is doing a bad job at retaining. But that is nowhere near the topic of this post.

    ReplyDelete
  5. ok- your logic is pretty sound-- and I really appreciate your taking the pain to clarify-- here's where I am coming from:

    See; there are cultural and personal-ego related reasons many folks may have about hanging on till the bitter end and seeing things through, through thick and thin.

    In that senario, a the points like the ones you're writing about; sound exactly like a senior guy trying to belittle another guy's decision to shift jobs without actually showing the money...
    specifically; by creating doubts- and also at the same time hinting that the guy is failing to realize or appreciate what the company is doing for him or what the hidden costs (and hence hidden risks) of a job shift are.

    Perhaps creating that sort of impression wasnt your outcome in writing this article; but ok, (and I'm saying this as the persistent guy, not as some quitter)--- one lesson I've learnt the hard way is that THE MARKET IS GOD; and people staying or leaving is purely dependant on the job market at the time.

    So, ok, even if some great guy leaves-- and it turns out to be a bad decision for both him & the company he left-- so ok, either they (the guy & the company he left) will come together at terms that more closely reflect the market reality--- or they'll both blunder along, with a sharper sense of how the market moves.

    In either case; both will get better grounded to the market reality-- and if both are committed to the market and both are actively seeking out opportunities, both the guy and the company will find the way to someday leverage that understanding of the market for heavy profits someday.

    The real danger is if either the guy or the company is expecting a status quo and free lunches-- because those things dont exist; but if both are dynamic and value being grounded to the market reality; I think both the guy and the company stand to gain in that scenario.

    I hope this reply is not overly long... but this is something I'm passionate about... and so, I thought I'd put my thoghts accross...

    What say ?
    And BTW, is Elusive Cheese = Binux?

    Just wondering...
    -Anon

    ReplyDelete