Human Resources

Decoding the True Cost of an Employee

As an employer, the true cost of hiring an employee is more than the wage or salary offered by the organisation. In this article, ROHAN NATHAN explains where additional costs exist, and how to account for them.

The analogy of an iceberg, demonstrates the observation that in many cases only a very small amount of information is available and the real information or bulk of the data remains unnoticed. This principle holds true for businesses who inaccurately record the cost of their employees. The article below demonstrates how employees cost companies between 25% – 50% higher than their monthly salary might suggest.

In the UAE, businesses face several costs when employing an individual. These costs are made up of visa charges, government fees and federal labour regulations, yet most businesses do not take them into account when factoring the

true cost of an employee to their organization.

Let’s take the example of an employee who earns AED 12,000 a month, split 50 -50 into Basic Salary and Allowances. A business can expect to incur the following costs over a year.

A total indirect cost of AED 42,000, translates to AED 3,500 per month on top of the employee’s salary. An employee who is costing the company AED 12,000 in salary actually costs them a combination of ‘Salary + Indirect cost’ i.e.  12,000 + 3500 = 15,500 per month. It means that the employee’s true cost to the company is a staggering 30% higher! Apart from this, companies also incur other employment costs that fall into several broad categories:

Recruiting expenses
Sourcing qualified staff who can be effective resources for a company is not easy. It is important that companies take time to hire the best people for their business. It’s a time consuming process and costs the company money. Organisations might also choose to use the expertise of a specialised recruitment firm, whose fees can range anywhere between one – three months of the employee’s salary for a successful placement.

Office space
Unless the role you are hiring for is an outdoor salesperson, companies need to account for the cost of physical space to house the new employee. The rent per square foot varies depending on the location of the facility. Typically, an employee will require 150 square feet to function effectively and comfortably.

Other equipment
A basic requirement for companies these days is to provide their staff with a computer and telephone. Even with decreases in PC prices, companies can spend between AED 2500 – 5000 on a computer with software and an additional AED 750 on a telephone including installation. Don’t forget the periodic expensive upgrades you will need for your LAN and voice mail systems.

A simple way to keep track of the cost
Instead of figuring out each cost component separately you can use a simple method to anticipate the true cost of an employee for your organisation. Taking the employee’s salary and multiplying by 16 months will give you a close estimate of what you can expect to spend on that employee over the course of a year.

i.e. Employees Salary x 16 / 12 = Estimated Annual Cost

Although this “rule of thumb” is helpful in planning rapid growth, like any rule of thumb the underlying assumptions need to be rechecked periodically, so as to not underestimate the cost of your employees.

Instead of figuring out each cost component separately you can use a simple method to anticipate the true cost of an employee for your organisation.

Recruiting employees is always a difficult and important activity, especially in a rapidly growing market like the UAE. Businesses can consider outsourcing non-core functions of their business such as IT, HR, Accounting, Marketing and Legal to avoid incurring high costs associated with employing full time individuals. The usage of contract staff is also a good way to cover peak periods of business activity, without incurring the high costs associated with permanent employment.

For companies to be successful, they must budget for the true cost of their employees and make informed decisions when comparing the cost of retaining a non-core function in-house or deciding to outsource it.

About the author

SPI Group

An integrated platform created to serve entrepreneurs and service providers. SPI engages with over 100,000 Entrepreneurs & Senior decision makers through a unique combination of cutting edge business magazines, high profile B2B summits and conferences, strategic alliances with Govt, business associations and government bodies. SPI also leverages the power of digital marketing and social media.

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