For the sake of occasional business analysis — such as calculating return on investment (ROI) on a project, hiring a new employee, allocating costs — here’s a simple formula for calculating the hourly cost of an employee:
cost per hour = annual gross salary/1000
So the $75,000/year salary costs the company $75 per hour. The $30,000/year data entry person costs the company $30 per hour.
This quick and practical calculation is based on the assumption that the overhead, including payroll taxes, health insurance, benefits, office space, office equipment, telephone, Internet, electric power, transportation, and so forth costs the company about as much as the employee gross salary.
So the step-by-step calculation, using a $75,000 salary, is:
- Double the gross salary ($150,000)
- Divide by 50 because a work year includes 50 weeks ($150,000/50 = $3,000)
- Divide by 40 because a work week includes 40 hours ($3,000/40 = $75)
I hope that’s helpful.
Do you own a business? Do you run a business? Then I recommend you follow me through this simple math and some reasonable conclusions.
Assume you have a person making a $50,000 gross salary. Assume their true cost — including health insurance, overhead, work space, computers, Internet, electric power, payroll taxes, etc. — is $80,000. That person costs your company about $40 per hour.
For that calculation, I divide the $80,000 by 49 to calculate the weekly cost of $1,633 (I take off two of the 52 weeks in a year for vacation and another for national holidays). I divide that weekly cost by 40 to get $40.82 per hour. And then for convenience I round that to $40 per hour.
So, with that hourly cost in mind, I’d ask myself these questions:
- Thinking about computers and Internet connections: Do I really cut costs by having employees working with old technology?
- Books and magazines: I’m betting $15-20 per business book, or annual magazine subscription, on saving my people some time, generating good ideas, helping them work better. So the marketing books for the marketing team, programming magazines, business magazines, how expensive are they, really? How much do they have to help to pay for themselves?
- Meeting expenses: how much does it cost me to start a meeting 10 or 15 minutes late? Is it worth it to bring lunch into a meeting to save my team members the time of going out to lunch?
My conclusion: spend the money. Keep your technology up to date, encourage employees to get whatever books and magazines or website subscriptions help them, and combine meetings with meals a lot.
What do you think?