How much does an employee cost per hour? Learn how to calculate from salary to an hourly rate for your employees, so you can make better use of their time, track actual costs and keep them in balance with benefits.
The real employee cost per hour is the standard measure. You usually know the hours spent at work by office, store, or plant workers. For remote workers, most employers assume 40 hours, even though they can't measure it.
The Importance of Knowing How Much Your Employees Cost
That extra hour at the end of the day, the 40-hour project, the two-hour meeting with 12 people that accomplishes what could have been accomplished by three in half an hour—it's good to know what your people and their efforts really cost your business.
Factors that Influence Employee Cost
How much does an employee cost? Your employee cost per hour includes not just wages and salary but also average costs of benefits per employee per hour, like health care, retirement and vacations, plus the overhead per employee per hour, like internet and office space.
Just like cost of living, hourly costs vary widely from place to place. My costs went way down when I moved a business from Palo Alto, California to Eugene, Oregon. You can pretty much bet that costs in Silicon Valley or New York City are going to be a lot higher than in any normal small town in rural America, and costs in the United States are higher than costs in Mexico or Malaysia.
Employee cost per hour also depends on the type of business and nature of the job. A software or professional service business is likely to pay its employees more than a lawn care or housekeeping business. Highly skilled professionals are likely to cost a company more per hour than entry-level assembly or unskilled workers. Minimum wage affects some industries more than others.
Real employee cost per hour generally varies with market conditions as well. When rents, utilities, wages, and benefits increase, hourly cost increases with them. You can expect employee cost per hour to go up when the economy is booming, and down during a recession.
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How to Calculate Salary to an Hourly Rate
For the first step, learn how to calculate salary to hourly rate. It's simple math.
Let's take the $100,000 annual gross as an example. That's for about 48 weeks of work output if you subtract four weeks from the 52 weeks in a year for holidays and vacations. Divide $100,000 by 48 and you get $2,083 per week. Divide $2,083 by 40 hours per week and you get about $52 wages and salary per hour. That's the gross, before taxes, overhead, workspace, utilities, health insurance and all the rest.
For a quick second example, the employee getting $7,000 per month earns about $318 per day for an average of 22 workdays per month. That's about $40 wages and salary per hour. That too is before all those additional costs.
So that's step one: calculate salary to hourly. It's relatively easy, in theory, with the hourly worker, and isn't that hard for annual or monthly salaries either.
Is 40 Hours the Real Standard?
However, before we leave this first step, consider the concept of 40 hours. Is that what people work in your organization? Consider constant availability via email and other online work activities. Then consider time spent in the office on personal social media and personal email, browsing the web and so on. It helps to think how these questions affect your business and your gross hourly calculation.
Calculate Your Employees' Hourly Cost
The second step is to add the average cost of benefits per hour to the cost of salary and wages per hour. Benefits includes payroll taxes, health care, vacation pay and possible additional benefits such as life insurance, daycare, family leave and so on. How much do benefits cost per employee? Experts estimate that the average cost of benefits per employee amount to 1.25 to 1.4 times the gross salary. Use that as a basic rule of thumb.
The third part of the employee cost per hour includes additional costs of employees, beyond salary and benefits. These include the additional per-employee cost of office rent, office furniture, office equipment, internet bandwidth, phone lines, electricity, administration, data storage, security and any other expenses.
When I was running my own business, I divided the monthly costs of rent, utilities, computer equipment, and internet bandwidth by my headcount and added that into the calculation. Our rule of thumb, in that situation, was that the employee cost us about double their hourly gross salary.
This is a good point to consider the advantage of people working remotely, who don't take up the same space and probably don't involve the same overhead costs per employee.
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I recommend you use a simple employee cost calculator like the table here below. Once you know how to calculate salary to hourly rate, use the same formulas to convert average benefits per employee and average overhead per employee to hourly. You could do this using a spreadsheet, or by hand.
divide annual by 12
divide monthly by 4.2
divide weekly by 40
Health insurance per employee
Vacations per employee
Retirement per empllyee
Other benefits per employee
Office space per employee
Office equipment per employee
Other overhead oper employee
Total per employee
Optimizing Your Employees' Hourly Rate with Good Management
Please don't jump to the quick, but faulty, conclusion that knowing the real employee cost per hour is a shortcut for cutting all costs, regardless of benefits. Don't forget that benefits affect the company's culture and community. Training, for example, adds to the real employee cost per hour but also improves productivity and reduces employee turnover and therefore employee turnover cost. Meanwhile, turnover increases the cost of training and adds to the employee cost per hour. Expensive office perks add to the per-hour cost, but might help with recruiting and employee satisfaction.
I learned from one of the best, a very successful manager for a major tech company during its growth years, whose first name was Hector. Hector knew the real employee cost per hour for every one of his 15 team members, but that didn't turn him into a cost-obsessed manager. It also didn't prevent him from doing group trainings—sometimes even off-site team meetings of two or three days—even though the hourly cost of his employees would add up to tens of thousands of dollars. His group grew their sales from $2 million to more than $40 million in five years.
Quantifying employee cost per hour doesn't mean eliminating lunch, coffee breaks, training, team building or human interactions. But it does mean making good decisions about projects, meetings, productivity and how people spend their time.
A version of this article was originally published on June 25, 2019.
Photo: Getty Images