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The true cost of a new employee

When you’re calculating pay rises, it’s important to think about more than just how much you can afford. You also need to consider the true cost of replacing that employee.

Low pay rises can be unexpectedly expensive

It’s surprisingly common for businesses to offer low pay rises, only for workers to feel undervalued and resign. The employer is left with all the upfront costs of replacing them, plus paying the salary, plus training the new employee and lost productivity as they learn the ropes.

Some estimates put the cost of a new employee at around 40% of their salary and a 2021 Australasian survey put the price at an average of $23,860 per worker.

Overall, that low pay rise could cost your business a lot more than you bargained for.

Not paying enough might just cost you an employee

If you run the numbers you’ll see the impact that an insufficient pay rise can have. Let’s say you employ Ashley, an office manager who is paid $60,000. You offer Ashley a 4% pay rise, which will cost you around $2,400 more each year. With inflation running at over 7%, Ashley feels this isn’t enough and finds a job paying $68,000 almost immediately.

If you had provided Ashley with a 10% pay rise, it would have cost you around $6,000 more each year and you would still have your employee. Finding a new employee could cost you $20,000 or more.

Running the numbers

Make sure you understand salaries in your industry, and think about inflation, when you calculate pay rises. Also consider how easy it would be to replace the person and how much value they bring to your business. And think about extra benefits you could offer a valuable team member: do they want more flexibility or a four-day week?

What are the hidden costs of a new hire?

it can be easy to focus only on the base salary when considering the cost of a new employee. However, the total cost of hiring an employee in Australia goes far beyond their pay cheque. These costs include recruitment, workers' compensation insurance, setup and training, overheads, employee benefits, and much more.

  • Recruitment

Before you even bring a new employee onboard, you're likely to incur costs during the recruitment process. This can include expenses related to:

Advertising the position: Whether you're posting on online job boards, in local newspapers or using a recruitment agency, there's often a cost associated with advertising job vacancies.

Time spent reviewing applications and interviewing: Your time is valuable, and the hours spent sorting through resumes, conducting interviews, and making hiring decisions can add up.

Pre-employment checks: Background checks, drug tests, and skills assessments also add to the cost of recruitment.

  • Workers Compensation Insurance

In Australia, all employers are required to have workers compensation insurance to cover employees if they become sick or are injured due to their work. The cost varies depending on the state or territory your business is in, the nature of your business and the level of risk associated with the jobs your employees perform.

For example, small businesses in New South Wales can expect to pay between 1.5% and 3% of their payroll in workers' compensation insurance premiums. Be sure to factor this into your budget when hiring.

  • Setup and Training

Hiring a new employee often means investing in new equipment, software, and training and orientation. These costs can include:

Hardware and software: This could range from a desk and chair to a computer, specialised software, software licences, uniforms, and other necessary equipment or even a company vehicle. These costs can vary greatly but can easily add up to several thousand dollars

Training: Even experienced hires often require some level of training to get up to speed with your business's specific processes and practices. This can be formal training or simply time spent by other staff members to onboard the new hire.

  • Overheads

Overhead costs are the ongoing expenses associated with running your business. These costs can be surprisingly significant over the course of a year. When you hire a new employee, these can increase as a result of:

Utilities: More employees mean higher electricity, water, and internet usage.

Office space: If your new hire requires additional physical space, you might need to consider the costs of expanding your premises.Space: Divide the monthly rent by the number of employees to find the cost per employee.

Supplies: From stationery to coffee, new employees add to your office supplies expenses.

  • Employee Benefits

Australian employers are required to make superannuation contributions and provide paid leave and may offer other benefits.

Superannuation contributions: You are required to pay at least 11% (set to increase to 12% by 2025) of an employee's ordinary time earnings into a superannuation fund.

Paid leave: This includes annual leave, sick leave, and potentially long service leave.

Health insurance: Some businesses offer private health insurance as part of their benefits package.

  • Other Costs

Consider any other costs specific to your business. For instance, if you offer on-site meals, calculate the cost per employee. If the role involves travel, estimate those costs. Also consider the time cost to existing employees spend to help the new hire get up to speed, the potential for mistakes as the new employee learns their role, and the potential impact on team dynamics.

If you have any questions about pay rises or hiring this year, get in touch – we’d love to hear from you.


This post was originally published / written by BOMA and has been updated for freshness, accuracy, and to add extra content for comprehensiveness.

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