The cost of keeping an employee vs hiring a new employee 

For many businesses the cost of wages/salaries are their biggest cost each year. It’s a big number they see in their financials and so they try to keep that cost down. In turn, this means some companies can be hesitant to give pay raises to employees as they feel they can’t afford it. And whilst it’s important to think about how much you can afford, what happens if that employee leaves and you have to employ someone new? How much will it actually cost you to replace them? 

Low pay rises can actually end up costing you more 

Unfortunately, it’s common for companies to offer their employees low pay rises which can make employees feel underappreciated, and they end up quitting in the not too-distant future. The employer thinks that’s fine, employs someone new on the old/lower wage - problem solved right? What some employers fail to consider is that there are costs associated with onboarding a new employee. The most obvious, the costs of replacing them, but it’s also the time spent training the new employee, and the lost productivity/efficiency as the new employee come to grips with the role. 

Once you start to crunch the numbers, you might realise that giving your existing employee a reasonable pay rise may have been the cheaper option. A 2021 Australasian survey put the cost of employing a new employee at around 40% of their salary – an average of $23,860 per employee. So that low pay rise offer could cost your business a lot more than you bargained for. 

Not paying a comparable salary might cost you an employee 

If you run the numbers, you’ll see the impact that an insufficient pay rise can have. For example, you have a current employee, Kevin, who is an operations manager, and his salary is $60,000. You offer Kevin a 4% pay rise, which will cost you around $2,400 more each year. With inflation running at around 7%, Kevin feels this isn’t enough, finds a job paying $68,000 and hands in his notice almost immediately. 

If you had provided Kevin with a 10% pay rise, it would have cost you around $6,000 more but you would have kept an employee who knows the ins and outs of your business. Instead, you now have to find a new employee which could cost you an extra $20,000 or more. 

Running the numbers 

When evaluating pay rises, make sure you research salaries in your industry, factor in inflation, and the cost-of-living crisis. Also, consider how easy it would be to replace the person and how much value they bring to your business. There may be extra benefits you could offer a valuable team member (it’s not always just about money): do they want more flexibility or a four-day week? 

Before your next remuneration reviews, or if you are looking to employ a new person, get us to run the numbers for you to see what the real cost is for you. If you have any questions about pay rises or hiring this year, get in touch, we’re happy to help.