No-one would dispute, especially during these difficult times, that any prudent business manager must be in control of their costs and often one of the largest of these is the salary bill. It is easy to articulate and generally understood by everyone. Or is it?

 

If you look at salary costs in isolation, you would most probably end up with a false picture. A study undertaken some years ago involving Walmart’s Sam’s Club and Costco (source: HBR December2006) showed that Costco had an attrition rate of 17% compared to Walmart’s 44%.

If you assume that the cost of acquiring a new employee (all costs) equates to 1.5 times their salary, the following table provides a more accurate representation of the true cost to the business.

  Company A Company B
Employees 1,000 1,000
Average Salary £15,000 £18,000
Attrition rate 44% 17%
Recruitment cost per employee £22,500 £28,125
Total recruitment costs in a year £9,900,000 £4,781,250
Total Salary costs £24,900,000 £23,531,250

 

Add to this the fact that happier employees tend to take fewer sick days, the fact that they respond to training better (and lower attrition also often equates to lower training costs) and the fact that they are a key aspect of delivering a happier customer experience and you can start to see that bottom line salary costs form only part of the story.

When thinking about your salary bill, you need to look at the full picture and, in addition to the above, think about profit generated per employee.

The study mentioned above showed that the operating profit per hourly paid employee at Costco was almost double the equivalent at Walmart.