I hear that question a lot. Everyone seems to be looking for a magic formula that says, “ When can I afford to hire this new employee.” There is one, but we’ll get to that in a minute.
As a business grows, hiring a new employee, be it the first one or the fiftieth one, is a big decision. It is not one that should be taken lightly and should never be simply because you work too hard. Hiring a new employee costs money. Money in the form of time and future expenses. Some estimate the cost to bring on any new employee ranges from 1.5 to 3 times their annual wages. That’s a lot of money in any size operation. Ensuring the decision to hire a new employee is critically important.
What specific costs are a part of hiring a new employee? In general, they are:
Wages – You have to pay them, it’s the law. In some states you have to pay them more than in others. Minimum wage varies from community to community. Federally it is, as of this writing, $7.25 an hour. Most organizations pay more than that.
Benefits – There are two kinds of benefits; statutory and voluntary. Statutory means you have to have them. Things like Workers Compensation are an example of statutory benefits. Voluntary is dental care, time off, tuition assistance, etc.
Perks – This could be simple things like pizza in the back room, free coffee, and bottled water. Regardless, if you offer any of this there will be an added cost because of your new hire.
Taxes – A hard fast rule of life. You have to pay taxes. Federal and State Unemployment, Employer match on federal income taxes, etc.
Equipment – If your new hire needs any equipment, a computer, a cell phone, etc. those costs will be a part of the decision.
Training – Your new employee will need training, even if that training is nothing more than how you want things done, training is involved. Training takes time and time is money. Not only do you get to pay the employee for that training (that is the law too) you also get to pay the trainer; even if that trainer is you.
You may have other costs associated with a new employee but in general, these are the most common. As you can see it is more than simply saying you are hired, I’m paying you $10 an hour and that is it. Your costs go well beyond $10 an hour.
Knowing all of that, how do you determine if you should hire a new employee? We just focused strictly on cost. Many will make the decision based upon the answer to that cost question, “I can afford that cost.” To that answer I would say you are only partially right; there is more to the answer.
Going forward with the understanding you know why you are hiring this new employee, you need to consider one key element. It isn’t simply a question of “Can I afford this person?” it is a question of literally, “what is in it for my business?” In other words, what will this new hire contribute to your business and its sales? Will this person make you more profitable and by how much? I generally recommend to my clients that the person they hire needs to bring at least twice their wages in new revenue. That is the magic formula. Can your new employee double their salary in revenue produced?
Let’s look at an example. You hire a new employee. The work they will perform will earn your business an extra $100 a day. They will work for you full-time, 40 hours a week and you anticipate they will work 50 weeks a year. That equates to $25,000 in revenue from that employee. You hire this employee at $10 an hour. Is this a good hire financially for your business? Well, let’s see. At $10 an hour, 40 hours a week for 50 weeks they will be paid, in direct wages only, $20,000. Add taxes, statutory benefits, (as much as another 20% total) equipment, and training and you have most likely exceeded the $25,000 in new revenue this person will generate for your business. Financially speaking, this is not a good hire. It realistically does not become a good hire until their working for you adds minimally an additional $40,000 in revenue to your current total.
Understanding the impact of hiring a new employee is important in the decision process. Knowing the return they will bring, this is, after all, a simple Return-On-Investment calculation, will help you decide if the action is a good one or not.
Want to know more? Ask me, I’m here to help.