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A company s managers make a number of small incremental decisions related to employee benefits over time, frequently resulting in a wide array of benefits whose true cost is much higher than expected Frequent use of this measurement tends to result in a much more conservative view of suggested additions to the existing benefits pool Also, knowing the benefit cost per person allows one to make decisions regarding whether it is less expensive to use contractors on a higher perhour basis or hire new employees at a lower hourly rate, but with benefits Benefit costs are best measured on a per-person basis, so the measurement should include all benefit costs in the numerator and the total number of full-time equivalent employees in the denominator Benefit costs should include time taken off for vacations and sick time, all types of medical insurance (such as medical, dental, life, and disability insurance) net of employee deductions, and miscellaneous benefits, such as club memberships, dry cleaning costs, and company cars The measurement is: Total cost of time off + Insurance + Other benefits Employee deductions Number of full-time equivalent employees For example, the Sod Software Company, maker of operating systems for farmers, has assembled a high-powered group of 40 developers who have been attracted by the company and retained in large part by its excellent benefits package Nonetheless, the company is finding that the package is extremely expensive, and must determine if any further additions to its staff should be outside contractors who require no benefits The payroll staff assembles the following annualized benefits information: Benefit Type Medical insurance Dental insurance Long-term disability Short-term disability Vacation time Sick time Company cars Health club memberships Totals Total Cost $238,000 29,000 11,000 27,000 80,000 9,000 40,000 14,000 $448,000 Total Deductions $23,800 2,900 0 0 0 0 0 0 $26,700 Net Total Cost $214,200 26,100 11,000 27,000 80,000 9,000 40,000 14,000 $421,300.

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