Compensation Risk Management: The cost of a pay rise vs new employee hire

Updated August 11th 2023

Managing employee compensation in this current economic environment can feel like an exercise in risk management.

Losing key talent may be difficult to quantify but the cost of recruiting a replacement is estimated at around 40% of their salary.

Employers are left to either find ways to reduce the cost of replacing employees or adjust pay upward when the market demands it.

When you’re calculating pay rises, it’s important to think about more than just how much you can afford – and that’s to consider the true cost of replacing that employee.

Low pay rises can be unexpectedly expensive

It’s surprisingly common for businesses to offer low pay rises, only for workers to feel undervalued and resign. Leaving employers with all the upfront costs of replacing them, plus paying the salary, plus training a new employee and lost productivity as they learn the ropes.

Some estimates put the cost of a new employee at around 40% of their salary and a 2021 Australasian survey put the price at an average of $23,860 per worker.

Overall, that low pay rise could cost your business a lot more than you bargained for.

Not paying enough might just cost you an employee

Running the numbers you’ll see the impact that an insufficient pay rise can have.

Let’s say you employ Ashley, an office manager who is paid $60,000. You offer Ashley a 4% pay rise, which will cost you around $2,400 more each year. With inflation running at over 7%, Ashley feels this isn’t enough and finds a job paying $68,000 almost immediately.

If you had provided Ashley with a 10% pay rise, it would have cost you around $6,000 more each year and you would still have your employee. Finding a new employee could cost you $20,000 or more.

Running the numbers

Business owners must understand salaries in their industry, and think about inflation, when calculating pay rises. You need to consider;

  • is this employee easy to replace and how much value do they bring to the business
  • are there extra benefits you could offer a valuable team member: do they want more flexibility or a four-day week?

We can run the numbers for you before your remuneration reviews or if you are looking to hire. This online calculator from might be helpful to give you an estimate.

If you have any questions about pay rises or hiring this year, get in touch – we’d love to help you maximise your employment strategy.