management

Not Sure What to Pay the New Hire? How to Conduct a Cost/Benefit Analysis (+ Template)

24/02/2021
4 minutes read

How does the modern employee think about salary? Do they care more about actual salaries and bonuses, or would they rather be compensated through benefits such as free childcare and unlimited sick days?

Set a range for negotiations

Although the way in which employees view costs and benefits is constantly changing, you can still count on new hires negotiating their salary within a certain range that they have set for themselves. So, as an employer, you should be prepared to evaluate, and potentially negotiate, with your new hire’s proposed salary. To establish a range of your own, it is helpful to create a cost-benefit analysis. Conducting a cost-benefit analysis of an employee’s added value will help clarify if a particular candidate is a profitable hire, which will help you engage in effective salary discussions rather than guesstimating.

In addition to estimating the new hire’s ROI, your analysis will reveal a top and a bottom salary that will act as the foundation of your negotiation range. Typically, the bottom of the range should be based on the market-going rate of the position’s salary, while the top of the range should be based on the benefits this specific employee provides to the company. Some employees will be valued above market value, while some will fall below. 

 

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Benefits

To establish a top range, start by determining how much revenue the employee will generate (direct earner) or save (indirect earner) the company by looking at the position’s KPIs. It is easy to quantify revenue benefits for direct earners (i.e., sales representative), but may be a bit stickier to do the same for indirect earners (i.e., an in-house accountant). As a result, many companies fall in the trap of overvaluing direct earners and undervaluing indirect earners. Regardless, each type of earner should be looked at carefully and quantified accordingly. For example, a sales representative might have KPIs that generate the company $200,000 in revenue. Meanwhile, an accountant may save the company $100,000 in outsourcing and administrative fees. This particular position or employee may also free up resources elsewhere in the company which may increase the benefit provided to the company by say $100,000, putting their value on-par with the sales representative.

Costs

Once you have an estimate as to how much revenue the new hire will generate or save, you will have a better understanding as to how much the position is actually worth to your company. This is a great starting point for your top range which means you can move on to estimating what the new hire will cost. So, the next step is to research what the market demands for similar positions using sites such as Glassdoor. For example, if the average salary of a sales representative with 3-5 years of experience in your area is around $45,000, then you can expect that a new hire with a similar background will demand something similar. However, if your particular new hire has 3-5 years experience at a leading company, they may come with additional insight and experience that will put them above the market average. So, if the employee can offer a unique skill set, network, or industry-insight factor in how this may raise their cost above the industry average.

 

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Additional Costs and Benefits

Based on the sales representative example, suppose you have estimated that the new hire will generate your company $200,000 during the first year. While the going rate of this position is $45,000, your candidate has a unique background that increases their cost to $60,000. At this point, your estimated profits for the first year are around $140,000. However, there are still additional costs and benefits associated with your new hire investment that may be more difficult to quantify. For example, it is hard to place a price on benefits such as work ethic, compatibility with other team members, and personality traits. While difficult to predict and subsequently quantify, these individual traits will undoubtedly make a difference in your hiring decision and should therefore be accounted for during negotiations. 

It’s true that these hard-to-estimate benefits can tally up the salary expected from your new hire. However, there are also additional costs that you as an employer need to bear in mind when setting your range. For example, the time and cost it takes to carry out a recruitment process. It is also important to remember that not every employee prioritises salary in monetary form, so approaching every new hire with hefty salaries that lack additional benefits may backfire. Instead, be transparent with your new hire as to how they would like to factor in benefits such as insurance, work-life balance, unlimited vacation, commission, stock options, bonuses, etc. into their salary. Be prepared to align and potentially negotiate these benefits alongside monetary salary.

Finally, sum the costs and benefits of the hire. If the number is positive, then the employee is a good investment. If not, then see what adjustments need to be made. Can you sacrifice a benefit for a more cost-effective hire without compromising business objectives? Also keep in mind that this should act as a base, rather than a definite, non-negotiable number. At the end of the day, salary negotiations come down to just that - negotiations. It is important to be solution-oriented, flexible and do your best to be respectful and realistic of all parties’ expectations.

Need some help putting your cost-benefit analysis on paper? Download our Salary CBA template to help you get started. Simply download the file and export it to your spreadsheet software of choice (e.g., Excel, Numbers, etc.)