Managing Employee Costs in a Smarter Way

By Linda RoperMarch 21, 2023

Hiring new employees can set a company back quite a lot of money, not to mention the cost of keeping existing members of the team onboard. In fact, the CIPD estimates the average cost of filling a vacancy, including labour at £6,125, and for a more senior role, around £19,000. And as a business owner, managing employee costs is an important aspect of your financial success. From salaries to pension contributions to national insurance and ongoing training, employee costs can quickly become overwhelming.

In this article, we’re going to discuss what employees' costs are, with clear examples, before revealing our top tips when it comes to managing employees' costs in a smart and sustainable way. So grab a coffee, and let’s talk about employees and business expenses.  

Magnifying glass next to 4 individual wooden blocks forming the word 'cost' Table of Contents

What are Employee Costs? 

First, let’s start by defining what we mean by employee costs. This term can refer to a wide range of expenses that a business incurs as a result of hiring new talent, training those individuals, and the costs associated with building and maintaining a team. So when we talk about employee costs, this can include but is not limited to recruitment fees, onboarding expenses, internal and external training and development, salaries and bonuses, national insurance contributions, travel expenses, the cost of growing your team such as buying new furniture and investing in software. It is important to note that different types of employees and different roles within a company can incur different costs, and each can have a significant implant on your bottom line. 

Desk with paperwork, glasses, calculator and one red folder named 'employees' and one black folder named 'salaries"Examples of Employee Costs 

Here are a couple of clean-cut examples of employee costs to give you a good idea of what a business has to consider before hiring, firing, or growing a team. The most obvious employee cost is salary. And salaries are generally the largest expense associated with employees. But, if a company attempts to limit the salary available, they may put themselves at a disadvantage, as attracting and retaining the best talent often comes down to the salary associated with the role advertising. Although, a well-paid position is not the only cost associated with hiring a new employee. While this is ultimately the biggest business expense to consider, a company may also need to folk out for;  

Recruitment costs; include expenses such as advertising, agency fees, and employee referral programs that are associated with finding and hiring new employees. 

Pensions; contributions that a company is required, often by law, to make to an employee's pension plan.  

National insurance; is a mandatory tax that employers must pay on the earnings of their employees. 

Training costs; include the cost of providing employees with additional skills and knowledge to help them perform their jobs more effectively.  

Software; this includes the cost of software and tools required for employees to do their jobs effectively. 

Travel expenses; the cost of transportation, meals, and lodging when employees must travel for work or travel abroad as part of a business trip.  

So, as you can see, depending on the role, responsibilities, job requirements, and the need to travel for work, employee costs can quickly add up. This is why hiring the right individual for the job is such an important business decision to make. The wrong candidate can clearly cost a company an eye-watering amount, and if the company decides to let them go or they choose to leave, they will find themselves once again in the position of hiring for the same role a couple of months later.  

How to Calculate Employee Costs 

Calculating employee costs can often be a complex and time-consuming process, as there are many different factors to consider. The basic formula for calculating employee costs is as follows: 

Total Employee Costs = Salary + National Insurance + Pension Contributions + Training Costs + Travel Expenses + Other Employee Benefits 

However, this formula does not account for the costs of recruitment or software. To accurately calculate employee costs, a company must consider all of the expenses associated with each employee. It is critical to understand the total cost of each employee in order to ensure that the company can afford to hire and retain them.

Tips for Managing Employee Costs in a Smarter Way 

Managing employee costs can be difficult for many businesses, particularly those that are just getting started. To make this process easier, here are three suggestions for effectively managing employee costs: 

Reduce recruitment costs: Recruitment costs can be significant for businesses, particularly those that rely on agencies to find new hires. Businesses can therefore reduce recruitment costs by running their own ads on LinkedIn or Indeed, for example, as well as using employee referral programs to find new talent. This will effectively lower the cost of finding and hiring new employees

Invest in productivity-boosting software: Another way to bring down the cost of employees is to invest in software designed to promote productivity. This can help to boost performance whilst minimising unnecessary downtime during work hours. Some software can also help reduce human error and automate processes to speed up progress.  

Focus on training and upskilling: Offering training and upskilling opportunities to existing employees can also help reduce recruitment costs and increase productivity. Businesses can reduce the need to hire new talent and improve work quality by investing in their existing team. Employee engagement and retention can also be improved through training and development, as employees are more likely to stay with a company that invests in their professional development. There are plenty of ways of providing employees with opportunities for training and development. Companies could provide in-house training led by senior members of the team, mentorship programs to help younger members progress, and even online courses that can be completed virtually.  

3 male and 3 female employees sitting around table and discussing workFinal Thoughts 

Employee cost management is a critical aspect of running any successful business. And by finding new and innovative ways of managing business expenses, you can make better financial decisions as a company and use the money saved on recruitment to nurture your current team. So rather than spend more money on recruitment agencies and unnecessary employee expenses, be wise about where you invest your cash. When savings can be made, make them and start working towards a more sustainable financial future.