Hidden Payroll Costs Significantly Drive Labor Costs Up

More articles about rising salaries and the cost of employee turnover seem to be surfacing again, concurrent with attrition trends pointing upward.  While many organizations consider cost of turnover just another cost of doing business that practice has increasingly serious implications for the bottom line. The costs are particularly troubling when the loss involves a top performing employee.

The recent KPMG 2011 U.S. Hospital Nursing Labor Costs Study identifies several trends and benchmarks in relation to hospital nursing labor costs in the United States.  Other businesses could learn quite a bit from the results as well, particularly the when it comes to “hidden” labor costs.

Respondents to the survey indicated it is not easy to quantify all labor costs related to full-time direct care registered hospital nurses and mentioned various “hidden” costs. These hidden costs may be significant and are the result of nonproductive labor hours and associated opportunity costs, attrition, and time required to fill a permanent direct care RN position.

On average, 13 percent of hours are believed to be nonproductive hours. This suggests that additional costs can be attributed to nonproductivity e.g., due to training, education, and personal internet use. These costs may be even higher if the nonproductive hours are made up during overtime at an average 1.5x base pay. It is recommended when calculating the “all-in” payroll cost of a registered nurse that 13 percent of payroll costs should be added. 

Respondents stated base wages of full-time registered hospital nurses are on average $56 thousand per year (or $26 per hour). Respondents further indicated that base wages on average 57 percent of all-in fully loaded cost ($98 thousand per year or $45 per hour).

The average attrition rate for registered nurses was 14 percent. Respondents stated it takes on average 37 days, or over seven work weeks, to fill a permanent RN position. Taking into the account the 233 hours, or 28 work days, that are on average spent on new hire orientation and training, it appears attrition could have an impact of almost 65 work days, or 13 work weeks, on productivity related to the affected position. 

During that time, contingent staff was required to fill the open position or overtime hours were offered to existing staff. In some cases, services may be curtailed for lack of critical support.  In addition, managers and human resources are diverting attention to recruitment and replacement rather than retention and engagement of the current workforce. 

In addition to base wages, insurance costs, and non-productive time, recruitment costs added another 2 percent to all-in payroll costs. 

Quite a few lessons could be learned from this study.  The most significant story is the impact of hidden payroll costs on the bottom line. To lower and control payroll costs:

  1. Calculate “all-in” payroll costs.  Most companies already compute and track the obvious costs – base wages and insurance costs.  But few businesses monitor “hidden” costs including the cost of turnover.  Start today.
  2. Don’t be penny-wise, pound foolish. Assign a dollar amount to time-to-fill open positions.  That extra dollar your experienced employee is demanding may be a drop in the bucket compared to finding his or her replacement.
  3. Track rate of turnover.  Find out why employees leave, then do something about it.  In addition to higher levels of employee engagement and customer satisfaction, employee retention saves lots of dollars on recruitment costs and lowers hidden payroll costs. 


Ira S Wolfe