Importance of Considering True Cost of Replacing Employees When Calculating Pay Rises

Calculating pay rises involves more than just affordability. It is crucial to factor in the true cost of replacing an employee to make informed decisions.

Unexpected Expenses of Low Pay Rises

It is quite common for businesses to offer inadequate pay rises, leading to employees feeling undervalued and ultimately resigning. This leaves the employer burdened with upfront expenses for replacement, salary payments, training costs for the new hire, and decreased productivity during the learning phase.

According to estimates, the cost of hiring a new employee can amount to around 40% of their salary. In a 2021 Australasian survey, the average cost per worker was reported as $23,860.

In reality, a seemingly small pay rise can end up costing your business significantly more than anticipated.

Insufficient Pay Rises Can Result in Employee Loss

Analyzing the numbers reveals the impact of offering inadequate pay increases. Let’s consider the case of Ashley, an office manager earning $60,000. If you offer Ashley a 4% pay rise, the additional cost to your business would be approximately $2,400 per year. However, with inflation exceeding 7%, Ashley feels undervalued and quickly finds a job offering a salary of $68,000.

Had you provided Ashley with a 10% pay rise, the additional expense would have been around $6,000 per year, but you would have retained your valuable employee. Finding a new employee could cost you $20,000 or more.

Performing Comprehensive Calculations

Ensure that you have a clear understanding of salaries within your industry and consider inflation when calculating pay rises. Additionally, evaluate the ease of replacing the individual and the value they bring to your business. Explore additional benefits you can offer to retain valuable team members, such as increased flexibility or a four-day workweek.

We can assist you in running the necessary calculations prior to your remuneration reviews or if you are in the process of hiring. You may find the online calculator provided by helpful for estimating costs.

If you have any inquiries regarding pay rises or hiring this year, please don’t hesitate to contact us. We would be delighted to assist you.


Your Outside Team



Need a bit of assistance with your business? Contact an Outside Accounting team member today and learn more about our fixed fees. You won’t regret it.

Aside from business consultation, we are business accountants Wellington who offer accountingbookkeeping, payroll services designed to help you achieve greater financial success.

You can click here to speak to a businessaccounting and bookkeeping firm. We will give you a call to know more about your needs. We will explain to you how we can improve your business. 




Wellington Accountants | 

Business Accountants | 

Construction Accountants 

Property Accountants 

Contractor Accountants 

Hospitality Accountants |

Property Developer Accountants | Accountants Wellington | Wellington Accountant | Restaurant Accountants | Cafe Accountants | Business Consultation | Business Adviser

AddressLevel 2, 182 Vivian Street,
Te Aro, Wellington 6011, New Zealand 

Mail: PO Box 24-457, Wellington 6142

Phone04 889 2975

New Zealand Accounting, Bookkeeping & Property Business Consultancy Services | Wellington & Lower Hutt Xero Property Accountants Business coach business consultation business adviser

Business Accountants: Understanding Changes in Residential Property Taxation

Recent years have seen significant adjustments to the tax landscape, particularly concerning residential property. The government has responded to calls from various quarters to address investor demand in this sector. Notably, recent changes have been initiated to reverse tax policies affecting residential property, aligning with promises made by both National and ACT during their election campaigns.

Read More »