How Much Should Your Business Spend on its Employees

A question many business owners ask time and time again is “how much should we be spending on employees?” Unfortunately, the answer is not so cut and dry. Many people don’t realize that employee costs extend far beyond salary. Other costs like health insurance, paid time off and sick time, as well as unemployment insurance and all federal and state taxes need to be factored in to understand true employee cost.

So where does this all leave an employer? That is a murky area. The size and budget of your organization all dictate how much a business can afford to reasonably spend on employees. A business can fail if they aren’t careful with spending. Similarly, a business can also fail to thrive if they do not invest in their employees.

How Much To Spend on Employees–Striking a Balance

As expected, compensation accounts for the majority (68%, on average) spending a company does on their employees. After that, benefits account for the remaining 31%. Private sector employers, on average, paid less for employee health benefits than public sector employers.

Employers trying to determine how much to send on their employees should start with BLS data. This can be a helpful balance to benchmark employee spending, but of course, employers need to consider a wide range of factors before jumping to any decisions. Here are some additional factors to examine before setting a number.

“Health Insurance offerings, including:

  • Employee Premium Cost (Individuals & Family)
  • Employer Premium Cost (Individuals & Family)
  • Employee Premium Contribution Percentage (Individuals & Family)
  • Employer Premium Contribution Percentage (Individuals & Family)
  • Out-of-Pocket Maximum (Individuals & Family)
  • Deductible (Individuals & Family)
  • Prescription Drug Copay (Individual & Family)
  • Coinsurance Percentage
  • Emergency Room Copay
  • Office Visit Copay
  • Specialty Office Visit Copay

Voluntary Benefits offerings, including:

  • Critical Illness Insurance
  • Accident Insurance
  • Cancer Insurance
  • Pet Insurance
  • ID Theft Protection
  • Life Insurance
  • Short-term Disability
  • Long-term Disability

In addition to:

  • Worker’s Compensation
  • Salaries By Title
  • Network Access
  • Service & Medical Management Capabilities
  • Total Program Cost
  • Network Performance and Discounts
  • Administrative or Unit Cost
  • Financial Stability
  • Performance Guarantees”

Source: Jeff Griffin

It’s important to have a solid understanding of what competitors are offering their staff, not just in terms of salary, but in terms of benefits as well. Having a firm grasp on what other area businesses are offering not only helps companies remain competitive in a changing business climate, it creates a level playing field for fellow business owners.

Knowing what others are doing also gives you an idea of their employee expenditures, although seeing what others are spending per employee does not mean companies need to (or can) do the same. Employers can, however, find areas where they can gain an edge over the competition to attract and retain top talent. When looking at areas of spending, companies may find small ways to save while still offering a robust benefits package.

The takeaway: what companies decide to spend per employee depends on a few factors and no two businesses are the same. Choosing how much to spend on employees is a business decision that should not be taken lightly.