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 Business.govt.nz 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.

 

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