How to Calculate the Cost of Adding Benefits for Your Staff

Today’s employees are more demanding than ever before. Fewer people are willing to work for companies that don’t have a strong company culture and sense of ethics that includes fair wages, benefits, and other elements that many jobs today lack. Fortunately, if you’re considering adding benefits, you’ll be happy to know that it’s not going to cost you as much as you think. 

The problem, for most businesses, is that the numbers add up quickly. By the time you add benefits to what you’ve already invested in a base salary, onboarding, and training, you’re going to spend as much as 1.25-1.4 times their base salary in the end. That’s why you need to know how much your benefits are costing you and whether they’re worth it before you add anyone to your payroll. 

The case for benefits 

Today’s economy is a place where the conversation cannot be ignored. People are demanding better wages and more benefits from their employers and refusing to settle for less. Employees are leaving, in droves, because of poor treatment from companies that just don’t care. The warning signs are everywhere—if you’re not taking care of your people, don’t expect them to take care of your business. 

By offering benefits to your employees, you are creating:

• A sense of appreciation and loyalty. When people feel valued, they are more likely to work harder and stay with the company even if they seek growth. 

• A better company culture, which fosters retention, longevity, and motivated, successful employees. 

• A healthier workplace where there will be fewer sick days, fewer people quitting or leaving for better jobs, and fewer cases of burnout. 

• Better employee morale because people understand their value. When you show people how much they matter, and really show them by providing something like benefits, you’ll make a big impression. 

• Competition. That’s right—if you want the best employees, you’ve got to have the best incentives. Part of that is to have a company worth working for, which includes offering the benefits that people deserve. 

Like your employees, benefits are an investment. They're something that will come back to reward you in the end. Ask companies that have always offered them—there are some brands that give people benefits from day one that are more impressive than anything you’ve ever seen. How do they do it? Some might have bigger budgets, but others just find a way to make it work because that’s what it takes to keep employees satisfied and feeling valued.

Now, let’s look at some statistics before we dig into the details of calculating your benefit costs. 

The numbers, according to the experts

The U.S. Bureau of Labor Statistics is a great resource to learn all about the real cost of giving employees benefits. They collect information on all kinds of labor statistics, including the average cost that employers pay for benefits and salaries, both separate and combined. 

According to their latest report:

Civilian Workers cost employers about $11.82 per hour to add benefits to their salary. Currently, the average wage of civilian workers is $25.91 per hour before benefits are factored in. 

Private Industry Employees, on the other hand, only cost about $10.53 per hour for their benefits, which is in addition to their average $24.82 per hour salary. 

State and Government Employees will cost employers around $19.82 per hour, and their average salary is around $32.62 per hour, making them some of the highest paid and most well-provided for employees today.  They’re also the most expensive, however. 

Back to civilian workers and private industry employees—it'll cost you less than $12 per employee to provide benefits. And that’s assuming you fall within the “average” range. You could spend even less if you have a small team, are able to find better packages, or don’t offer as many benefits as some companies. 

The choice is really yours to make, but when it comes down to it, every employee is worth the investment. After all, they’re an investment in and of themselves—without them, your business wouldn’t function. Why wouldn’t you want to invest in that?

How to determine what benefits will cost you

In order to figure out exactly what you’re going to spend, you have to decide what you’re going to offer. There are several considerations, and everyone has a different idea of what constitutes “benefits”. This could include anything that is additional to a salary and designed as an incentive for employees. Some common examples are listed here:

• Health insurance
• Life insurance
• 401(k) accounts
• Sick/Medical leave
• Gym memberships
• Vacation days
• Pension or retirement funds
• Employee events and occasions
• Company cars
• Wellness days

Some of these will be more costly than others, of course, so keep that in mind. In fact, offering someone vacation days, provided that you’re adequately staffed in their absence, isn’t costing you anything more than paying them to stay home (or take a trip) instead of coming to work. 

The bottom line? Stop thinking about what benefits will cost you and start thinking about the cost of not offering benefits to the people who will make or break your business.

The process

Now that you know a little more about just what “benefits” could be and how you can use them to incentivize your employees, let’s talk about how to work it into your budget before you start doling out the top-shelf rewards. The first step is to calculate the total annual cost of all the benefits that you are going to offer. For example, you may determine that between insurance, 401(k) matching, vacation days, and other perks, you are spending $20,000 per year, per employee. Add up every perk that you’re including that has a charge associated with it to get this number. 

Next, you’ll need to add that benefit amount to the employee’s annual salary. This will allow you to determine exactly how much it will cost you each year to have an employee on staff. For example, if you spent $20,000 on their benefits and their salary is $60,000, their total cost would be $80,000 per year. 

If this isn’t feasible, figure out where you can cut the perks a bit and still make people feel appreciated without breaking the bank. 

If you’re looking to get some numbers in mind for those future hires, you can do the math to calculate what is known as the benefit load. This tells you the ratio of your benefits to salary, expressed as a percentage. In the example above, you’d have 20,000/60,000, or a benefit ratio of 30%. What does that do for you? It makes calculating new hires a breeze. 

Now, you know that if someone is hired at $10 per hour, it will actually cost you $13 per hour with benefits to keep them on staff. 

Blind spots to watch for

If you’re a business owner, you’re likely not also a finance guru. Therefore, it’s easy to overlook common benefit-related expenses or other costs. You might not be that great at forecasting, which can make it harder to plan. Fortunately, we’ve got some tips here to help. 

1. Watch for administrative costs that you might not think about. In addition to the benefits themselves, you’ll also have to pay for HR staff and software to take care of the benefits administration. 
2. Paperwork is all about the details. Too often, people miss enrollment dates, fail to terminate coverage, or don’t have the proper documentation on file for one reason or another, and that can have a serious impact. These common paperwork mistakes can be avoided if you’re careful with your paperwork and picking who’s in charge of it. 
3. Healthcare costs rise every single year and that can drive up the cost of benefits significantly. Government policy, aging populations, service prices, disease prevalence, and several other factors come into play here. 
4. Some employees have fluctuating benefits or will need to change or expand their benefits over time. This is going to require you to offer additional types of coverage or more benefits for life changes that occur. This will increase the cost of benefits per employee. 

It can be challenging to work benefits into your budget properly. However, if your employees are healthy and happy, your organization will thrive. After all, it’s the people that you hire who determine whether your business succeeds or fails. If you manage them well and give them what they deserve, your investment will be returned many times over. 

How to choose the perks

Of course, the next question becomes how to pick exactly which benefits you offer. Fortunately, there’s plenty of advice and insight out there, including from employees themselves. For most small businesses, it can be hard to determine where to get started among the sea of information. There is a lot of insight out there on all the different types of benefits that businesses can offer, and it seems like everyone has a different opinion about how to do it right. 

If you really want to get the right balance, consider starting by setting a budget. There's no sense in breaking the bank to give people benefits, after all. Make sure that what you are giving is reasonable and isn’t overdoing it. It's also going to be helpful here to do a cost analysis. You can add up all the benefits and their costs and determine how much benefits are actually going to cost you. 

A lot of small businesses start with much more limited benefits plans because they can’t afford all of them. However, as time goes on, they continue to expand to offer more perks to their employees so that they can keep up with the competition and build that ideal company culture. 

You should always offer the standard benefits, such as life, health, medical, and dental insurance. Disability and retirement coverage will also be a great investment in your employees. You should look at all of the standard benefits that you can manage here. Then, you’ll want to consider unique options, too. 

Some companies are revolutionizing the way employees think of perks. They're doing more to create a comfortable, welcoming space and that includes getting creative with their perks. A few of the ideas we’ve seen include:

• Gym memberships or an on-site fitness center
• Dog-friendly workplaces
• Free lunches or events 
• Retreats and company cultural events
• Unlimited PTO (a growing trend)
• Remote work
• Paid parental leave for all parents
• Free daycare services

Make sure that you factor in all of the perks to calculate what your employees are costing you. And when you’re sourcing new candidates, make sure that you keep the benefits package handy to show them just how much they’re getting in addition to the salary that you’re paying them. 

Of course, another way to avoid the cost of hiring a bunch of HR employees is to outsource the work to someone who can handle it properly. Professional HR teams and accountants are available to offer their insights by performing an analysis. They will not only do the work of keeping your system running well, but they will identify inefficiencies and failures within the system. 

Save the salaries and partner with Smith.ai instead 

You need employees. Every business does. But that doesn’t mean you need every employee to be an in-house, on-staff worker. In fact, you probably shouldn’t because there are some parts of your business you can do better by letting someone else handle it. 

Enter Smith.ai, and a firsthand example of how a partnership with our team of virtual receptionists can save you a small fortune in salaries and benefits by saving you the hassle of staffing your own customer service or call center team. 

When you outsource things like after-hours answering, scheduling and intake, and even live website chat to our agents, you can reduce your operating costs and labor expenses. Plus, you might even be able to give more benefits or better perks to the employees that you do have. And we can even help you craft the perfect strategy for managing it all, too. 

You can learn more when you schedule a consultation to discuss our 24/7 live agents that can field all of your calls, messages, appointments, and so much more. You can also reach us at hello@smith.ai or (650) 727-6484.