Payroll: Get the Whole Picture

Payroll is a (if not the) major area of management focus for controlling operating expenses in most businesses.  If staffing is managed closely and kept at optimum levels (or better) profit dollars will drop to the bottom line in relatively large amounts.  If payroll is not managed as a priority, it will most assuredly have an extremely negative effect on the profitability of the company.

Everyone knows and understands very clearly the obvious expense associated with payroll is the salaries component.  However, in addition to the obvious cost, there are the less obvious “hidden” costs such as payroll taxes, workers’ comp insurance, health and other group insurance, vacation and sick leave, 401(k) or other retirement plans, training, etc. that are not so well understood.  For example, if you are paying an employee $12.00 per hour and have a relatively standard benefits package, the total cost of that individual is far more than the base $12.00 per hour rate.  The sample table below illustrates the affect these less obvious components will have on the base payroll dollar. 

As you can see, the final number is more than 33% higher than the base rate and can be much higher.  Although the rates will vary and the extent to which you are affected by other circumstances will be specific to your company, the basic elements are consistent with possible exception of health and related insurance or other benefits such as 401(k).  Therefore, it is absolutely critical that the total cost structure be fully understood when making operating decisions or bidding/quoting new business.  Otherwise, you could be in for a very big and unhappy surprise.