The Modern Approach To Labor Costs


Personnel costs (often limited to wages) can be defined as human labor input necessary to manufacture a product or deliver a service in a given enterprise. Planned personnel costs are created by multiplying the amount of working time by rates of pay. In addition to labor expenditures directly related to the production of particular goods or delivering services, personnel costs also include labor expenditures on so-called “indirect personnel costs.” They consist of funds for rewards for employees, protection of and meeting the social needs of employees.

The increase in labor productivity, mainly due to technical progress, leads to a reduction in the workload per unit of product. Improvements in productivity can be compensated by raises for employees. In the result, personnel costs will remain stable. In short, an employer can afford to pay employees more, if it leads to an increase in their productivity.

How To Calculate Personnel Costs While Implementing Individual Projects?

labor costs

The basic labor cost calculator is the monthly payments of employees. Because employers often make these payouts conditional on the results achieved, they apply bonuses and rewards, added later to monthly payouts.

The classic model of employee payments can be replaced by tools focused on effectiveness measurement. The employer often limits indirect personnel costs only to those required by law, such as an adequate social room, overtime premiums, etc. What, however, if the job is your second home? As it is in case of those employed by Google or Facebook, where employees can spend their free time at work, play games, eat better than at home. How to calculate labor cost successfully? What to focus on?

Online tools for measuring the effectiveness of one’s work are helpful. Such as TimeCamp, which can measure with great accuracy how much time it takes to complete their tasks.

Here is an example: The online shop marketing manager calculates the marketing costs for their department. It has three employees and cooperates with three companies as advertising outsourcing. He tries to calculate the cost of labor for employees within the company and the cost of labor of the outsourcing companies.

The areas of marketing communication used by the company are as follows:

  • Google Adwords – run by an external advertising agency, which costs $2000 per month as a direct deposit to Google and $400 per month as a benefit for conducting an advertising campaign. In addition, the agency sends regular work reports to the head of marketing. Every time a company introduces discounts, rebates, or a new short-term marketing strategy, the marketing specialist hired by the company contacts the agency – TimeCamp tracks how much time they spend on this activity. Eventually, it turns out that they spend about 8 hours per month discussing the advertising strategy, which costs the company about 80$ (it is a part of their payout equal to 4 hours of their work time), which includes providing feedback to their supervisor and explaining any doubts they may have.
  • Facebook Ads – the situation is similar to Google Adwords, with the difference that the marketing specialist devotes a lot of extra time to controlling the activities of external agencies, which, as TimeCamp shows, takes them 36 hours of work, and costs the company 360$. On the other hand, services of a marketing agency responsible for Facebook campaigns costs further $2000. $500 of which is the agency’s direct payment allocated to Facebook advertising.
  • Newsletter – is operated by a company that has also created an online shop engine, but is realized with quite a lot of workload, involving a graphic designer, copywriter, and marketing specialist, which in monthly terms was calculated to 40 hours of work, i. e., $400 for the company.

👉See how to calculate the exact cost of an employee.

The Optimization Of Company Costs, Processes In The Company, And Personnel Costs

labor costs

The marketing manager decided to resign from external agencies and reorganize the company so that all advertising activities were based on employees within the company. They analyzed the costs incurred so far by the company and found out that:

  • $400 was the cost of handling Google Adwords’ ads,
  • 80$ was the cost spent by the marketing Specialist on communication with Google Adwords,
  • 1500$ was the cost of handling Facebook promotions inside the company,
  • 360$ cost the time of a marketing specialist dedicated to realizing the marketing strategy on Facebook,
  • $400 was the cost of mailings.

In addition, the results of mailing were also unsatisfying, which was a direct reason for changing the organization of tools and the way of sending newsletters. Bearing in mind the above, the marketing manager knew that at the cost of $2740, they could hire someone who would take up the position of an advertising coordinator with a budget of $2000 for direct payment and $740 for necessary, cyclical training of all the marketing team.

To Sum Up

The modern approach to personnel costs in the company takes into account not only social costs but also working time costs. As never before, time management is becoming more and more important, because nowadays there is no need to convince anyone that employees and their time are the greatest value for the company

The Modern Approach To Labor Costs

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