The true cost of a new employee

Not paying enough can be surprisingly expensive – the cost of replacing an employee can be much higher than providing a reasonable salary boost.

When you’re calculating pay rises, it’s important to think about more than just how much you can afford. You also need to consider the true cost of replacing that employee.

Low pay rises can be unexpectedly expensive

It’s surprisingly common for businesses to offer low pay rises, only for workers to feel undervalued and resign. The employer is left with all the upfront costs of replacing them, plus paying the salary, plus training the new employee and lost productivity as they learn the ropes.

Some estimates put the cost of a new employee at around 40% of their salary and a 2021 Australasian survey put the price at an average of $23,860 per worker.

Overall, that low pay rise could cost your business a lot more than you bargained for.

Not paying enough might just cost you an employee

If you run the numbers you’ll see the impact that an insufficient pay rise can have. Let’s say you employ Ashley, an office manager who is paid $60,000. You offer Ashley a 4% pay rise, which will cost you around $2,400 more each year. With inflation running at over 7%, Ashley feels this isn’t enough and finds a job paying $68,000 almost immediately.

If you had provided Ashley with a 10% pay rise, it would have cost you around $6,000 more each year and you would still have your employee. Finding a new employee could cost you $20,000 or more.

Running the numbers

Make sure you understand salaries in your industry, and think about inflation, when you calculate pay rises. Also consider how easy it would be to replace the person and how much value they bring to your business. And think about extra benefits you could offer a valuable team member: do they want more flexibility or a four-day week?

We can run the numbers for you before your remuneration reviews or if you are looking to hire. This online calculator from Business.govt.nz might be helpful to give you an estimate.

If you have any questions about pay rises or hiring this year, get in touch – we’d love to hear from you.