How Much Is A Good Employee Worth?

The unemployment rate in the United States has been hovering around 8% for almost 3 years. Job creation is poised to be a major campaign issue in this year’s election. Both candidates will claim to have the answer, but I’m not sure either is aware of exactly what costs go into hiring a good employee.

As a former personnel manager I’ve done extensive studies of the true costs of an employee to a company. Here are my thoughts on that topic.

What are the costs involved when a business hires an employee?

As an example, I’ll hire a hypothetical employee named John.  John will be a supervisor/manager of his department in my company. I need a good employee in this position, so I have offered John a yearly salary of $59,000 a year, or $28.36 per hour. That would arguably be a livable wage in most parts of the country.

Since the government, and others, will want their pound of flesh from John, he will not take home $59,000, but a lessor amount after taxes and other deductions.

So what will I have to deduct from John’s check to arrive at his take home pay?

The Costs John Will Pay (costs are approximate and will vary from place to place)

JOHN'S SALARY: $59,000
LESS DEDUCTIONS FOR THE YEAR:
John's share of health/dental: $2,376
State unemployment insurance: $126
Disability insurance: $149
Medicare: $856
State income taxes: $1,893
Federal income taxes: $6,500
Social Security: $3,661

John’s Take Home Pay For the Year: $43,439
(52 wks. X 40 hrs. =2080 hrs. /$44k = $20.88/hr.)

The Costs to the Company to Hire John

JOHN’S SALARY: $59,000
PLUS:
Company's share of health/dental: $9,561
Life and other insurance: $153
Federal unemployment insurance: $56
Disability insurance: $149
Worker's Comp: $300
State unemployment insurance: $505
Medicare: $856
Social Security: $3,661

NET COST TO THE COMPANY: $74,241
(2080 hrs. /$74,241 = $35.69/hr.)

As you can see, hiring and keeping a good employee is not cheap. But it doesn’t stop there. The difference between John’s starting salary of $59,000 and his take home pay of $43,439 is $15,561. Here’s the question — Who paid the $15,561 — John, or the company? Most of you might think John did. Your argument would be that it was “taken out” of his check. I realize that John will get a W-2 at the end of the year saying he paid $15,561 — but did he really?

Take a Closer Look

In order to pay John, and cover his taxes and deductions, the company had to generate $74,000 in income. If that doesn’t happen, John can’t be paid his full salary, and I would be forced to reduce his hours, or lay John off. Not because of his work, but the income of the company couldn’t sustain his salary.

Who wrote a check to the health insurance provider? Who wrote a check to Workman’s Comp? Who wrote a check to the IRS? Who wrote a check to Medicare? The answer is — the company wrote checks for both John’s part, and the company’s part. for all the taxes and deductions for John.

Yes, the company got some bookkeeping deductions for paying all the costs involved in hiring and employing John. Payroll expense would be deducted from taxable gross income at the end of the year. However, at the end of the day, regardless of who paid what, or how, the company still had to generate $74,000 for that year to keep John on the payroll and provide the dollars to pay all the costs associated with him.

What’s John’s “Dog In This Fight?”

If only that were the end of the story, we’d have a happy ending. Unfortunately there are many more company costs associated with John before we’re done. I am paying John $59,000 for 2080 hours of work per year.

Is it realistic to think that John will produce income for the company during every minute of those 2,080 hours? Of course not, there will be down times, bathroom breaks, paperwork, non-productive duties, etc. Would it be realistic to believe that John could produce income at least 4 hours out of every 8, or 1,040 hours a year?

In order for John to produce enough income to pay his way in the company he would have to produce at least $57.00 per hour for 1,040 hours a year.

What Other Costs Are Necessary to Keep The Doors Open?

Payroll is usually the largest expense for most small businesses. While income goes up and down, payroll is a constant. The employee always knows what their check will be while the employer rarely does.

Additional costs to the company would include such things as inventory, property taxes, business insurance, bookkeeping costs, vehicle maintenance, gas, utilities, rent or lease payments, association dues, advertising and marketing expenses, printing costs, web site, computer maintenance, cleaning service, just to name a few. John is also going to have to produce additional income to help pay a share of these costs as well. Realistically, he will have to produce more than the $57.00 above.

Some Final Thoughts

When companies experience economic hardships the biggest target to salvage the company is payroll. What companies should be doing, is operating their businesses each and every day as though they were in a recession, even during good economic times.

When times are good, mistakes are not as noticeable to the bottom line. Bad habits become normal behavior, and when bad times come, the bottom line suffers. Hiring and firing is never easy, no matter what the economic condition. That’s why today’s businesses are having a tough time gauging the value of hiring now, versus hiring later — or hiring at all.