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One of the factors that job seekers consider when they choose a company to work for is the benefits package.

Whether your company only offers standard benefits like health insurance, or includes voluntary benefits like an employee wellness program, your employee benefit plan can give you a competitive advantage in the job market.

Of course, the benefits you offer come at a cost to the business.

Here I’ll break down these costs by benefit type and provide some advice for helping to reduce costs without sacrificing quality.

Total Cost Of Employee Benefits

According to the Bureau of Labor Statistics (BLS), employer costs for employee benefits for private industry workers averaged $12.77 per hour worked in December 2023. This works out to 29.6% of total compensation ($43.11 per hour).

Civilian workers’ benefits are slightly higher at $14.13 and state and government workers at $23.03.

Based on a 40-hour week, the average cost of employee benefits for private industry workers is $510.80 per week and $26,561.60 per year.

Employee Benefits Composition 2023 vs 2022 

Total compensation rose by 11.66% in 2023 with the split between wages and salaries and benefits remaining the same.

ComponentCost(2023)% of total compensationCost(2022)% of total compensation
Total Compensation$43.11100%$38.61100%
Wages and salaries$33.0370.4%$27.1970.4%

The composition of employee benefits shifted slightly in 2023 with supplemental pay making the biggest gain.

ComponentCost(2023)% of total benefitsCost(2022)% of total benefits
Legally required benefits$3.1724.8%$2.9125.5%
Paid leave$3.2625.5%$2.8825.2%
Supplemental pay$1.7113.4%$1.3712%
Retirement and savings$1.5011.7%$1.3311.6%

We'll now dig into these a bit more:

Insurance benefits costs

Insurance benefits comprise:

  • Life
  • Health
  • Short-term disability
  • Long-term disability

Broken down by a percentage of total insurance benefits costs ($3.14), this looks like:

ComponentCost(2023)% of insurance benefitsCost(2022)% of insurance benefits
Short-term disability$0.13.2%$0.082.7%
Long-term disability$0.051.6%$0.051.7%
Breakdown of insurance benefits costs 2023 vs 2022.

According to research by the Kaiser Family Foundation, the average premium for single coverage in 2023 is $8,435 per year while the average premium for family coverage is $23,968 per year. This represents a 7% increase from 2022.

This means that for, single coverage, most companies are paying somewhere between $7-10,000 and $19-29,000 for family coverage. 

A report by Mercer expects the cost of health benefits to hump 5.4% this year. 

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Disability insurance calculation

The cost of disability insurance depends on the length of the plan and like, worker's compensation, is also impacted by industry.

Although quite old data, the BLS estimates that disability insurance averages out to ~1% of the worker’s salary.

Life insurance calculation

The cost of life insurance for employers varies depending on who gets covered and the type of coverage.

Often group-term insurance gets a better rate per employee and negates the need for individual medical exams.

Legally required benefits costs

Legally required benefits comprise:

  • Social Security and Medicare (mandatory contributions from employers and employees under the FICA (Federal Insurance Contribution Act)
  • Federal unemployment insurance
  • State unemployment insurance
  • Workers’ compensation (calculated depending using your payroll, class codes, and X-Mods data).

Broken down by a percentage of total insurance benefits costs ($3.17), this looks like:

ComponentCost(2023)% of legally required benefitsCost(2022)% of legally required benefits
Social Security & Medicare$2.5781.1%$2.2978.7%
Federal unemployment insurance$0.030.9%$0.031%
State unemployment insurance$0.144.4%$0.144.8%
Workers’ compensation$0.4313.6%$0.4515.5%
Breakdown of legally required benefits costs 2023 vs 2022.

Paid leave benefits costs

Paid leave benefits comprise:

  • Vacation
  • Holiday
  • Sick
  • Personal

Broken down by a percentage of total benefits, paid leave benefits costs ($3.26), this looks like:

ComponentCost(2023)% of paid leave benefitsCost(2022)% of paid leave benefits
Breakdown of paid leave benefits costs 2023 vs 2022.

Supplemental pay benefits costs

Supplemental pay benefits comprise:

  • Overtime and premium
  • Shift differentials
  • Nonproduction bonuses

Broken down by a percentage of the total supplemental pay benefits cost ($1.71), this looks like:

ComponentCost(2023)% of supplemental leave benefitsCost(2022)% of supplemental leave benefits
Overtime and premium$0.4325.1%$0.3926.2%
Shift differentials$0.084.7%$0.074.7%
Nonproduction bonuses$1.270.2%$0.3969.1%
Breakdown of supplemental pay benefits costs 2023 vs 2022.

Retirement and savings benefits costs

Retirement and savings benefits comprise:

  • Defined benefit
  • Defined contribution

Broken down by a percentage of the total retirement and saving benefits cost ($1.5), this looks like:

ComponentCost(2023)% of retirement and saving benefitsCost(2022)% of retirement and saving benefits
Define benefit0.4228%0.4130.1%
Defined contribution1.0772%0.9569.9%
Breakdown of retirement and saving benefits costs 2023 vs 2022.

As the workforce ages, retirement benefits—namely 401(k)s—are gaining in relevancy.

Most organizations opt for matching 401(k) which is normally between 4 and 6% of pay with additional administrative fees and one-off setup fee on top.

Voluntary Benefits

Depending on your compensation philosophy and your workforce, you may want to offer additional benefits on top of what’s considered industry standard.

This could include:

  • Vision and dental insurance
  • Health savings accounts (HSA)
  • Flexible spending accounts (FSA)
  • Paid time off
  • Supplemental income protection
  • Employee stock options (ESO)
  • Tuition reimbursement
  • Pet insurance
  • Fertility benefits
  • Wellness e.g. gym membership
  • Childcare support

How much these benefits cost will depend on numerous factors such as supplier and breadth of coverage.

What's important is the value to your organization, your employees, and ultimately your return on investment (ROI, more on this shortly).

See a more complete list of the types of employee benefits available. 

How To Calculate The Cost Of Employee Benefits

The total cost of employee benefits will vary depending on the size of your organization and the coverage of your plan.

Calculating the cost of employee benefits involves several steps:

  1. Identify all benefits: both mandatory and voluntary.
  2. Determine individual costs: For each benefit, calculate the cost per employee. This could be a fixed amount for some benefits (like some insurance policies) or a percentage of the employee's salary (like in the case of matching retirement contributions).
  3. Consider administrative costs: Add any administrative costs associated with managing these benefits, such as software, staff, or third-party services.
  4. Calculate total annual cost per employee: Add up all these costs for each employee to get the total annual cost per employee.
  5. Sum for all employees: Multiply the total annual cost per employee by the total number of employees to get the overall cost of employee benefits for the company.

How To Optimize Your Benefits Package For Maximum ROI

Here’s how to optimize your benefits package to get the best ROI:

  • Use data: Conduct surveys or focus groups to understand what benefits are most valued by employees and combine them with usage data. You can then evaluate the costs of each benefit versus its value to employees.
  • Benchmark against industry standards: Compare your benefits package with those of similar organizations in your industry to ensure competitiveness.
  • Offer flexible benefits: Consider flexible benefits plans that allow employees to choose the benefits that best suit their needs, maximizing the perceived value of the benefits package.
  • Include non-monetary benefits: Non-monetary benefits like flexible working hours, remote work options, and professional development opportunities can be highly valued by employees and often come at a lower cost to the employer.
  • Communicate effectively: Ensure that employees are fully aware of all the benefits available to them and how to utilize them. Effective communication can increase utilization and appreciation of the benefits offered.
  • Regularly review and adjust: Monitor the effectiveness of your benefits package and make adjustments based on feedback, changing needs, and budget considerations.
  • Leverage technology: Use benefits administration software to streamline management, reduce administrative costs, and provide employees with easy access to their benefits information.

What Affects The Cost Of Employee Benefits?

  • Industry: Different industries have varying norms for benefits, influencing the competitive standard an organization must meet. Additionally, your industry will impact your insurance costs
  • Company size: Larger companies often have more negotiating power with benefit providers, potentially lowering costs per employee.
  • Employee demographics: The age, health, and family status of employees can impact costs, especially for health insurance and retirement plans.
  • Geographical location: Costs vary by region due to differences in living costs, healthcare prices, and legal requirements.
  • Legal requirements: Mandatory benefits, such as social security, workers' compensation, and in some places, health insurance, vary by country and region, affecting overall costs.
  • Economic conditions: Inflation and economic trends can influence the cost of benefits, including insurance premiums and retirement plan investments.
  • Market competition: To attract and retain talent, companies in competitive markets might offer more extensive or expensive benefits.
  • Plan design and providers: The specifics of how a benefit plan is structured and the providers chosen can significantly impact costs.
  • Administrative costs: The expense of managing benefits programs, including staffing, technology like benefits administration software, and third-party services, also contributes to the overall cost.

Benefits As A Competitive Advantage

While benefits are a cost, they can go a long way to making you a more attractive employee and help with your recruitment and retention efforts.

They can also help you create a happier, healthier, and more productive workforce.

For more advice on using benefits as a competitive advantage, join our supportive community of HR and people leaders sharing knowledge and expertise to help you progress in your career and make greater impact in your org.

By Finn Bartram

Finn is an editor at People Managing People. He's passionate about growing organizations where people are empowered to continuously improve and genuinely enjoy coming to work. If not at his desk, you can find him playing sports or enjoying the great outdoors.