RSM South Africa

What is the cost of an employee?

Job creation is a topic that we see in the media on a regular basis. There are many initiatives, often implemented at great cost to the taxpayer, aimed at Job Creation which don’t seem to be working out as planned. South African Labour Laws protect the Employee to such an extent that added to the challenges that Employers face in employing people is the burden of hiring someone who does not fully match the job requirements or the Employers’ culture. In the South African context, an Employee in a mismatched job role can at best lead to years of under productivity and at worst a termination, possibly resulting in a lengthy and costly labour dispute.

One of the few areas that Employers can control is the hiring decision. Informed decision making is vital to the successful outcome of the hiring process. One aspect of this informed decision making requires a thorough understanding of what an Employee actually costs the business.

A few things to consider in calculating the cost of an Employee:

  1. Recruiting expenses

    The first costs incurred by a business in hiring a new Employee are the recruiting expenses. These expenses may take the blatantly obvious form of an invoice if an agency is used or may take the more subtle form of expenses incurred in doing necessary administrative activities such as advertising the position, the preparation and time it takes the person conducting the interviews, drafting the employment contract, induction training and the like.

    Recruiting expenses for more senior staff can be significant and it may take a longer time for the business to “recover” those costs from that person.

  2. Total Remuneration

    This is one of the more obvious factors in calculating the cost of an Employee. The total remuneration is made up of the Employee’s total cost to company which is generally in the form of a fixed salary, the anticipated bonus amount and any other long term or short term incentive schemes that may already be in place or that the Employee may at some stage participate in.

    It is always important to ensure that the variable remuneration plans or incentive schemes will match the Employer’s needs more than the Employee’s wants. These plans and related documents should be monitored regularly and revised to suit the dynamic environment, within and outside, of the Employer.

  3. Office Space

    In most instances, Employees need to be given a space to carry out their job responsibilities. This space costs money in the form of rent or bonds etc. Take the square meterage of an entire office space, including areas such as passageways and stairways, and divide that by the number of employees to get an idea of how much space each employee takes up and work out what the cost per square metre is.

    The outcome of this exercise is often astounding as South Africans are not as space conscious as our European and Asian counterparts!

  4. Leave

    Minimum leave amounts are a statutory right held by Employees. There are 52 weeks in a year, 12 public holidays, 15 days annual leave, 30 days sick leave in a 3 year period (so let’s work on 10 days per year), 3 days family responsibility leave and 4 months unpaid maternity leave.

    So here is a sobering thought: provided an Employee does not take maternity leave and takes all of the other leave mentioned above, including public holidays, they are only working 44 weeks which translates to 84.5% of the year. If an employee takes maternity leave, on top of this, that employee is only working 26.6 weeks of the 52 weeks which translates to only 51% of that year.

    This does not mean that Employers can’t let Employees take leave. It just means that before granting additional leave or changing to a paid maternity policy, a very careful analysis must be made. These calculations are also vital to determining how much profit it is possible for an Employer to generate from an Employee given the true days worked. Of course the fewer the days worked, the longer it is going to take to recover the fixed costs and the longer it is going to take to make a profit off that Employee.

  5. Reduced work hours

    The cost of an Employee is generally only recoverable through the time that the Employee works. Obviously, the Employer will only make a profit once the costs have been recovered. Reduced work hours mean that it takes the Employer longer to recover those costs than if the Employee had worked the full day. This means that an Employee working reduced hours is far more expensive than a full-time employee.

    Reduced work hours have their benefits but generally far more for the Employee than the Employer! The cost of office space or equipment is not less if the Employee is not there. In fact, there is another facet to this puzzle in that when the Employee is not there, the Employer is incurring missed opportunity costs that are nearly impossible to quantify.

  6. Equipment Cost

    In most business environments, Employees need equipment in the form of computers, desks, phones, chairs and the like. Some of this equipment lasts a long time so while the initial cost for something like a desk may be quite high, the life span will spread that cost over a number of years making it a relatively low amount per employee per annum. Items like computers and laptops are normally only usable in a business environment for 3 years. The insurance on these items should also be factored in when determining the total cost so ultimately, these items will be a high cost per employee per annum.

    Licenses for software can be brought into the Equipment Cost or the Ongoing Cost but these seemingly small amounts do add up. In most situations, a number of software licenses are required per computer.

  7. Ongoing & Administration Costs

    Ongoing Costs include electricity, business insurance, stationery, general office supplies as well as the small things such as tea, coffee, milk etc. These are the costs that sneak in because they are mostly monthly costs requiring frequent payment so they appear small. Employers become desensitised to these costs and don’t associate this with the cost of an Employee.

    Administration Costs can sometimes fall into the definition of Ongoing Costs but it may be better to separate these costs depending on the nature of the Employer’s business and the manner in which the business is structured. Administration costs would include what each employee costs in terms of running a monthly payroll, certain HR functions, provident fund administration costs and so forth.

  8. Training

    Most Employees will require training of some kind at some point during their Employment. Generally, the more senior Employees require more training and this higher level training is, of course, more expensive.

    The risk of not recovering training costs can be dealt with through claw back clauses in the Employee’s contract in the event of termination of employment. This is not actually nearly enough as the real training cost would include things like on-the-job training and informal mentoring which cannot be accounted for. In addition, if the employee is good and has been worth training, the Employer will not want to lose out on this rare find and incur the costs of recruitment - which will start the cycle all over again!

Employees are indeed an expensive investment. Added to the risks of hiring a new person is the difficulty that South African Employers face in releasing themselves from their ‘investments’. A bad hire, combined with not understanding the true cost of an Employee, can certainly affect the bottom line.

Employees of smaller Employers will have a higher true cost than those of larger Employers. This is because larger Employers will have a broader base of Employees to spread certain costs over and areas, such as the recruitment and training processes, are more likely to be automated and more streamlined. 

The message here is not to dissuade Employers from hiring Employees or from participating in Job Creation, but rather to assist Employers in making informed decisions regarding recruitment which should aid in the protection of economic activity and guard against retrenchments. This careful decision making process should lead to slow and steady growth and, ultimately, create stable employment. 

Candice Eaton

Head of HR & Labour Consulting, Johannesburg

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