Thinking Beyond the Paystub: 4 Best Practices for Maximizing Labor ROI

Anthony Lewis

Nov 29, 2023

Economic uncertainty and challenging market conditions like the current environment often have business owners reaching for the calculator and thinking about their labor costs.

It’s not an unreasonable instinct in tough times: labor costs are typically the largest cost of a business, accounting for up to 70% of total expenses.

Simultaneously, several industries – especially manufacturing, construction, and distribution – are struggling to fill positions. Cost cutting decisions must take into account staying competitive in a shrinking pool of applicants. Sometimes the best strategy for reducing labor costs is to invest in retaining the employees you have.

No matter what your industry or your circumstances, the strongest approach looks at labor costs from a more holistic perspective. Efforts to reduce or contain labor costs can be hindered by limited thinking. If you, like many business owners, think of labor as just another fixed overhead cost, you might overlook some of the most effective ways of maximizing your labor spend and return on investment (ROI).

Here are five best practices for thinking about labor costs that will give you greater control while staying on track to achieve bigger goals.

1. Attract AND Retain Employees

You don’t have to choose between attracting new employees and retaining the ones you have. Retention and recruiting are interconnected: effective strategies for keeping your employees happy should serve double duty as recruiting tools.

The market rewards creative thinking when it comes to incentives. What keeps your best employees coming back day after day are often the same strategies that will give you an edge in the competition for new hires, so think outside the paystub with benefits your employees will brag about. Stock options and profit-sharing plans can be a game-changer in the effort to retain and recruit key employees, among other ways to build motivation and boost job satisfaction:

Generous benefit packages, including 401k, health insurance, dental, vision, life insurance, etc.
Increased vacation time
Deferred compensation programs
Stock incentive programs
Profit sharing plans
Flexible compensation structures
Flexible work arrangements, including working remotely and a 4-day work week
Career development, including advancement opportunities, training, and continuing education

2. Do the Turnover Math

Speaking of retention, don’t let the stress of a tight labor market leave you blind to the economic value of current employees. Turnover is more expensive than you think. A rule of thumb is that replacing a $100,000 employee will cost up to 60% of their salary to replace – and the loss of business efficiency can be even higher, up to 1-2 times their salary.

When you start looking at replacing someone with five to 10 years of experience, the losses really begin to add up. Managers come at a premium. Keeping a good one happy and motivated is money in the bank.

3. Avoid Shortsighted Productivity Gains

Good help is hard to find, and in the meantime, you’ve got good workers who will rise to the occasion. You may have 10 people doing the work of what took 15 before. It’s great that you hired such reliable employees but don’t make the mistake of resetting the baselines. Pushing employees to the point of burnout can result in significant costs and higher turnover.

4. Take Advantage of Accounting & Business Advisory Services

No matter how you decide to think about your labor costs or what industry you’re in, the best decisions for your business are built on a foundation of solid financial reporting. Effective strategies for recruiting, retention, and payroll management start with transparency around profitability and costs.

When you partner with Kirsch CPA Group, we take a holistic approach to the health of your business. With special expertise in manufacturing, construction, distribution, professional services, non-profits, and family businesses, our strategies are designed to help you grow your business with a proven and forward-looking process for moving you in the direction of your goals.