Now that the labor market is settling down to some degree, it is a good time for all organizations to take a look at what each job position costs them, not just the starting rate but the total cost to the organization.
It is amazing how many entities do not take credit for all the money they spend for maintaining an employee. For example, if you have an employee at $10 an hour and add 39 percent (or $3.90 per hour) for benefits, the annual cost is now $20,800 base plus $8,112 for benefits, totaling $28,912 per year, plus incentives.
What most employers do not add with this is the annual cash outlays for training, recognition and reinforcers that help retain employees, as well as the cost of developing a physical and emotional environment that ensures employees enjoy coming to work.
One of the main reasons a few executives are now developing this concept of total compensation is to reduce turnover by making sure they can attract and keep competent employees. Turnover is expensive for any employer. The greatest part of this expense is lost productivity and quality, with a lot of overtime and morale problems stemming from failure to meet customer demands thrown in. If you don’t know your total cost, you can’t take credit for it in your initial job offer package. Your job offer may be less attractive than a competitor’s. Does all that make sense?
If so, have your human resource people do a concept of total compensation for each job in your organization. As a side benefit, you should be able to manage your people-cost better.
Hacket Benchmarking and Research conducted a study of best practices with HR departments at more than 1,400 companies ranging in size from $200 million in annual revenues to nearly $147 billion.
Here is a summary of its findings:
- HR costs have remained stable as the value HR adds to the organization has grown.
- HR is spending less time on administrative tasks and more time on employee selection, retention, and development. However, HR managers still spend about 25 percent of their time on lower-value-added administrative tasks and not enough time on decision support.
- Companies that ranked in the top of the study in terms of profitability spend 40 percent less time solving HR administrative problems and almost twice as much time on HR decision support as other companies in the survey.
- The amount of money HR invests in finding, attracting, and retaining employees has doubled in recent years, in part, due to the tight labor market.
- There’s also been a threefold increase of HR investments recently in enterprise resource planning (ERP) systems designed to integrate employee data.
- ERP systems enhance HR’s administrative capabilities, improve the function’s information storage and retrieval processes, and facilitate the development of employee self-service tools.
- Annually, HR spends $1,584 per employee.
- HR costs are significantly lower for larger organizations, due to economies of scale. Organizations with more than 25,000 employees incur 30 percent lower costs per employee than those with fewer than 10,000 employees.
- Outsourcing remains a major HR cost—about 21 percent of its total budget. However, outsourcing expenditures declined 22 percent in recent years, most notably in training, development, and administration. HR departments are also more selective about what they outsource. IBI