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North Central Business Journal News

WHAT DOES AN EMPLOYEE REALLY COST?
(December 2001 issue)

by Sandra Kay Neal, Ph.D.

          Several area businesses are facing difficult economic times, and one option companies use when there is an economic downturn is laying off employees as a cost-cutting measure.  The problem for most companies is they have no idea how much money will be saved by this tactic because they donít know how much it costs them for each employee.

          Most companies use cost accounting principles for their capital investments.  But they forget to use cost accounting principles for the most expensive part of their business Ė their investment in human resources. 
 This error comes from the way budget items are described, so that all wages are lumped together in one section, and in other sections there are records for amounts paid to cover employee benefits and government programs and taxes.  There is nothing wrong with this way of accounting; it produces an accurate bottom line.

          However, when companies are attempting to cut costs, they have no idea what it actually would save them if they laid off one or more employees.  Whenever companies contemplate a layoff, it is beneficial to organize the cost of employees by position.

          A simple estimate can be done relatively easily.  The cost of benefits, government programs, and many taxes are usually determined by the number of employees, or by the number of employees in particular categories.  Dividing each of these costs by the number of employees can provide an approximate amount spent on each employee for these hidden costs.  These costs are then added to the wages paid each employee for the period covered by the hidden costs.   These costs can then be divided to find the weekly or monthly cost of hiring particular positions. 

          Layoffs are usually done on hunches.  But a better way is to determine what the actual savings to the company would be by eliminating a position.  The costs per position can be organized by the actual cost to employee that position.   Sometimes just organizing the human resources costs in this fashion allows a company to discern what positions could be eliminated to keep costs in line with revenue.

          Another option that may be useful, having organized the cost per employee in this way, would be to see if there are other ways to reduce the cost per employee without having to eliminate a position.   Some of the hidden costs attached to employees are based on the amount paid to the employee as wages or salary.  Reducing that amount slightly may reduce the actual cost per employee substantially. 

          Employees may be willing to take a temporary pay cut when it is explained that this will allow the company to weather the rough times.  Companies that retain employee loyalty explain decisions by showing the information that is used to make decisions.  Employees can be shown the actual cost of employing them, and shown how a 10% or a 15% temporary cut in pay can keep the company solvent. 

          Human Resources Cost Accounting can be a helpful tool in managing the overall company finances.  All the information is currently available to the company.  It just requires a little bit of arithmetic to see it clearly.

Sandra Kay Neal holds a Ph.D. in Industrial/Organizational Psychology and has 19 years experience helping organizations solve human resource issues.   Her company, Synergistic Organizational Solutions, specializes in aiding small businesses.  Dr. Neal can be reached at sos_hr@localaccess.com.



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