The Real Costs of Employees and How to Fix It

In the corporate world, one of the most important operating expenses is that of employees. In Net Profit and Loss on Employees (Net Income)

“Employee expense includes all wages, salaries, commissions, bonuses, benefits, and related items that are paid to full-time or part-time employees. Employee expenses also include payroll taxes for their employer’s share of Social Security, Medicare & Unemployment Insurance.”

The employment costs may be found in a few different areas: Current Employment Costs and Long Term Expenditures. In Current Employment Costs, the labor costs are laid out before income tax. These expenses/costs include what is known as Wages and Salaries Expense which would “include all amounts paid to employees in exchange for services including regular wages and salaries, overtime pay, shift premiums, bonuses, and commissions.” In addition to the wages and salaries, other compensation costs are related to employment: “Compensation arrangements include both cash benefits (e.g., health insurance coverage) and non-cash benefits (e.g., company-sponsored retirement plans).”

This is a significant cost of any business operation. Businesses must be aware of this expense as they need these employees not only to produce a profit for them but also because their competitors will have similar labor expenses; therefore, to remain competitive, they must maintain an advantage based on efficiency or another benefit from having more efficient labor.

There has been some research done on reducing corporate employee’s salaries by implementing job sharing which would reduce the number of employees that the business required while retaining the number of workers. The costs for wages and salaries are a significant portion of any business expenses. This is one area where most businesses focus their attention on, as it relates to continued success by increasing efficiency.

Another expense that is related to employees, yet not necessarily required in the process of creating a product or providing a service is the training costs. These are just as important for companies to consider as wages and salaries because they can be looked at as investments into increasing the efficiency of future workers; therefore, reducing these costs could provide a competitive advantage over other firms.

Training costs “include those expenditures incurred by an enterprise in connection with engaging new personnel, imparting job-related skills.” The most common type of training cost is courses taught by outside educational institutions such as colleges and trade schools, but there may also be in-house training conducted directly by the employer. For example, BMW has created its internal school where employees learn everything from manufacturing techniques to finance.

Training and education also include many other costs related to research and development such as: salaries, benefits, facilities with the company directly involved in R&D. The cost of personnel required for R&D is included under ‘Selling, General & Administrative (SG&A) expenses. This can be a large portion of an organization’s total budget.

Labor efficiency or employee efficiency is one method by which companies can improve their overall financial performance by reducing these labor costs while increasing revenue. Labor efficiency refers “to the volume of goods produced per worker or per hour.” Investors may use this factor when evaluating potential companies to invest in due to it being so important in managing a firm’s profitability.

Employee Costs Breakdown

 According to Hadzima, once you have taken into consideration basic salary, taxes, and benefits, the real costs of your employees are typically in the 1.25 to 1.4 times base salary range. 

In other words, an employee earning $30,000 will cost you somewhere between $37,500 and $42,000.

In the US, the average minimum wage is about $10 per/hour, which your actually paying about $14 per/hour or about $30,000 per/year.

Reference: US News – Read Article

How to lower employee costs?

One way to lower employee costs is to have a flat structure. A lot of companies do this with their engineering departments and they have things like software developers, quality assurance, etc., all under one director or lead engineer; whereas in other companies these are separate positions that may be overseen by several directors within the same department. Having different departments can make it easier for employees to say “well I wasn’t supervised well” when there is an issue on a product because you would then have at least two people who could potentially be at fault.

Another way that some firms reduce employee costs is through outsourcing. They may send work overseas so that they don’t necessarily need as many employees stateside; however, this carries some risks as well. One main risk is that the quality may not be as high and when the company brings it back in-house there can be a learning curve getting those employees to understand what worked and what didn’t work from the outside vendor.

The benefits of outsourcing are, for example, reducing labor costs by about 50 percent, improving quality control, and making available a wider range of skills or capabilities. The next logical step is to outsource other infrastructural support functions such as accounting, procurement, and purchasing which results in a gain of significant efficiency while creating better control over all processes being conducted by outsourcers themselves.

Benefits of Outsourcing

Many businesses choose to outsource some of their operations to save on costs, providing an opportunity for smaller firms. The move is a response to the need for greater flexibility and specialized skills from overseas staff who are less expensive and often more qualified than local employees.

By outsourcing IT, customer support, admin support, companies can reduce their overheads by as much as 50 percent while cutting operations costs down by 50 percent compared to using in-house resources. This also means that they can concentrate on business strategy rather than worrying about managing hardware and software needs.

However, if you do decide to use outside contractors you must manage your relationship with them effectively—without this, you could find yourself being let down when you really need them; wasting money and time which you could otherwise have put to better use. 

  • Focus on core tasks
  • Lower costs
  • Promote growth
  • Maintain operational control
  • Offer staffing flexibility
  • Provide continuity and risk management
  • Develop internal staff


In summary, there are many different ways to lower your employee costs and outsourcing is definitely one of them. Just remember that you need a strong management team behind the scenes so that your relationship with an outside contractor runs smoothly and you don’t waste any time along the way.

Interested in learning more about outsourcing? Request a  Free Consultation


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MySource is a leading BPO in North America with operations based in the Philippines. We have a proven track record and provide service to a variety of companies in the US. MySource provides Outsourcing solutions for different companies throughout the world. We help our partners get more done, faster.

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