When it’s time to negotiate an employee’s contract, you have to consider more than just their salary. Every employee that makes it to the offer stage is interested in the employee benefits you offer.
Employees are highly invested in your benefits program because it addresses important needs in their lives related to their health, retirement, and overall well-being.
To make a competitive offer, organizations need to know which benefits employees value and how much they cost to offer. Those factors are just a few to consider when putting together a compelling benefits package.
Let’s examine the details of the cost of employee benefits to help you optimize your benefits packages in this straightforward guide.
What do employee benefit programs include?
Employee benefits programs include a variety of perks. Because the employer sets the program, organizations typically offer a range of benefits, like healthcare plans or retirement packages.
Keep in mind that employers are legally required to offer at least some employee benefits. Other benefits are voluntary and offered at the employer’s discretion. As a result, the particular mix between mandatory and voluntary benefits means that organizations offer benefits packages tailored to industry standards and employee needs based on demographics. Even mandatory benefits vary between different states.
Why offer employee benefits?
Employee benefits are a staple in compensation packages for many reasons. For one, they are an added incentive employers leverage to attract top talent. Workers often opt for a contract that provides lucrative benefits over one that doesn’t.
Additionally, an attractive benefits program drives stronger performance because employees work harder for organizations that take good care of them. They’ll stay with the organization longer, too, strengthening employee satisfaction and preventing the human capital losses and brain drain that stem from employee turnover.
Taking better care of your employees translates into better results for everyone in the organization. Take a specific example like sick pay: Studies conducted in the parts of the country that mandate paid sick leave found a six percent increase in productivity and a 1.6 percent increase in the organization’s profits. Benefits benefit everyone.
Average cost of employee benefits
Employee benefits are an investment in your workforce and, by extension, an investment into the organization. So, what do organizations budget for when compiling their benefits packages?
Again, it depends on the specifics of your benefits package. According to the U.S. Bureau of Labor Statistics, benefits constitute about 31 percent of the average employer’s total compensation budget for labor in the 2023 civilian workforce.
Of the total benefits, healthcare had the highest cost amounting to 7.6 percent of total compensation costs. Paid leave was the next highest at 7.4 percent, followed by Social Security and Medicare payments at 5.7 percent, then retirement and savings at 5.1 percent.
To give you a better idea of how employers distribute that 31 percent of the total compensation budget, let’s go over a few of the most common benefits on balance sheets:
1. Worker compensation
Workers’ compensation insurance is a legally required benefit. Workers’ compensation refers to payments made to employees who sustained debilitating injuries as a direct result of their work.
2. Health, life, and disability insurance
Employer-sponsored health insurance is an extremely popular benefit because it reduces healthcare premium costs, provides a better deductible, and eases total costs for employees’ personal and family coverage.
While they are not legally required to provide a health plan, the employer mandate in the Affordable Care Act stipulates that employers with over 50 full-time employees offer an affordable healthcare plan to their full-time and/or full-time equivalent employees or pay a penalty.
On the other hand, life insurance policies pay out stipends to the plan’s beneficiaries in the event of their death. Employers are not legally required to offer insurance benefits like life insurance coverage, although it’s a great way to incentivize long-term tenures with the organization.
Disability insurance is an employer-offered policy that distributes funds to beneficiaries if the policyholder becomes disabled. Disability insurance covers long-term or short-term disabilities.
Whereas worker’s compensation covers disabilities for which the employer is liable, disability insurance covers disabilities that are not work-related. Employers are not legally required to offer long-term disability insurance, although many do so.
3. Unemployment insurance
Unemployment insurance pays into a pooled fund to sustain eligible workers who have lost their jobs. Unemployment is a legally mandated benefit. Federal unemployment insurance is paid in all 50 states. Additionally, some states collect state unemployment tax.
4. Retirement program
Typically, retirement programs consist of a long-term savings account like a 401(k). Retirement programs are an expense employers pay on the employee’s behalf and are not legally required.
How employers pay into the plan depends on the specifics of the contract. Many opt for a payment plan in which employers match employee contributions.
5. Voluntary benefits
Voluntary benefits are a broad grouping distinguished by the fact that employees participate in them willingly, sometimes because they contribute to work-life balance and overall wellness. A few include gym memberships, pet insurance, additional life insurance coverage, flexible work hours, supplementary vision or dental insurance, and reimbursements for a variety of employee costs, like commuting or parking.
Because they are voluntary, employers are not always legally required to provide them. However, the more voluntary benefits employers make available, the more attractive they are to current and potential employees.
6. FICA contributions
FICA contributions are an umbrella grouping of legal employer benefits mandated by the Federal Insurance Contribution Act (FICA). Passed in 1935, FICA guarantees social safety programs like Social Security and Medicare through a federally mandated payroll tax.
7. Profit-sharing plans
Profit-sharing plans are a compensation benefit in which employees gain access to long-term savings accounts with organizational profits. Because they are typically disbursed after a long period of time, profit-sharing plans have a similar function to conventional retirement plans like 401(k)s.
What to consider when offering employee benefits
A strong understanding of common employee benefits plans gives you an idea of what to expect when factoring benefits into your total compensation budget. However, there is more to consider beyond the benefits themselves when tailoring your suite of offerings.
The cost of benefits varies depending on several external factors. Familiarity with these factors helps you get a better idea of the average cost of benefits per employee, allowing you to assemble the best possible package for the best possible price.
The size of your company
Organization size is a massive consideration when compiling your benefits package. Larger organizations have an advantage when it comes to bulk purchasing third-party benefits like healthcare plans or retirement programs. Employers take a full inventory of their size to leverage its advantages and mitigate its disadvantages.
The benefits you offer
A crucial consideration when assembling your benefits packages is the benefits themselves—which benefits are you willing to offer? Employers need to find the right balance between cost-effectiveness and the attractiveness of their offers. An unattractive offer won’t attract top talent, while an overly generous benefits program risks exceeding your compensation budget.
Your location
Location is a considerable factor in your benefits offerings because mandated benefits differ from state to state.
For instance, New York requires employers to pay workers’ comp, disability insurance, and paid family leave.
Employee’s needs
Your benefits packages are for your employees’ benefit, as the name implies. That being the case, you’ll want to ensure that these benefits satisfy their needs. Finding the right benefits for your employees can be as simple as asking them what they want during your annual employee engagement survey.
Keep an open dialogue with new hires and an open ear to prevailing trends in your industry. Doing so helps you better determine what your employees want out of your benefits program.
Implementation fees
Employers and employees are not the only parties involved in a benefits program. Health benefits and retirement plans are typically managed by third-party providers.
Implementing these third-party services incurs fees in addition to the cost of managing them internally through HR. Expect to pay implementation fees when it comes time to enroll for your employees’ benefits.
Foreign exchange fees
International employees present a complicated situation when it comes to providing benefits. Depending on the specifics of their circumstances, employers are often required to pay foreign exchange fees to translate benefits like retirement savings plans or profit-sharing plans to them in their home currency.
If you have non-domestic employees, be sure to factor their specific needs into your benefits budget.
Annual increases
Are employee benefits fixed or variable costs? Things change, and benefit costs are no exception. The benefits you offer your employees are likely to increase over time.
Healthcare insurance costs are a prime example of the fluctuating prices of benefits packages. When it comes time to balance the compensation budget, be sure to factor in annual increases every year.
Final thoughts
Employee benefits are a mainstay in the modern job market. The range of benefits an organization offers determines its attractiveness to new talent, its ability to retain its best people, and its compliance with federal and state regulations. Offer a compelling employee benefits package to your workforce—not just because it makes your organization stronger but because it’s the right thing to do.
Still, employee benefits are more than a means to optimize performance: They are how employers demonstrate their commitment to their people.
Worried about your employees’ compensation?
In a tight labor market, business owners want to gain every edge to secure top performers in the talent pool and retain their employees. One of the most effective ways to bring the best possible people on board is through competitive benefits and perks.
Finding the right balance when calculating employee benefits costs is difficult, so leave it to the professionals. Payscale’s compensation software helps you strike that perfect balance that keeps both your employees and your budget satisfied.
Sign up for a free demo to see how Payscale’s solutions can level up your HR capabilities.
