One of the first questions on a buyer’s mind, regardless of product or service, is “How much is this going to cost me?” and business owners evaluating whether or not to utilize a PEO are no different. While there are a lot of options and differences among PEOs, it is a simple question to answer. This article will outline some key elements of pricing that you should evaluate if you are considering using a PEO.
Let’s Break Down the Numbers
Breaking down the investment in terms of “per employee, per year,” using a PEO will range from about $750 to about $1,500. So if you are a business owner with 15 full-time employees, your investment will be somewhere between $11,250 and $22,500 per year or $216 to $432 per week. While there will always be outliers on the high and low ends, the overwhelming majority of PEOs will fall within this range.
In FY 2014, PEOs’ gross profit margin was $1,295 per worksite employee; this figure represents the revenue remaining after all direct employee-related costs (salaries and wages, health/medical benefits, FICA, etc.) have been paid. Out of its gross operating margin, a PEO must pay all of its own operating expenses. So, in essence, the figure of $1,295 represents the amount PEO clients are paying for HR administration and all other services offered by their PEOs.
Although there are no strictly comparable numbers available for non-PEO clients, NAPEO has identified two different relevant statistics in recent publications, and averaged them in order to develop a comparison to the cost of HR administration for PEO clients:
- Bersin by Deloitte puts non-PEO HR spending at $2,112 per employee within companies at the lowest “maturity level”—those with just a compliance-driven focus in their human resources. Such HR departments are likely found disproportionately among small- and mid-size companies, of the sort that ultimately choose to hire PEOs. (Companies at higher levels of maturity have HR expenditures per employee that are up to twice as high as that lowest level of maturity).
- Bloomberg BNA reports that median budgeted HR expenditures per employee were $1,375 in 2015, averaged across all firms regardless of size.
- The average of the two numbers is $1,744. Given considerable economies of scale for larger companies (because they can take advantage of their larger size to spread fixed costs over their entire employee populations), this average almost certainly underestimates the cost for very small businesses which, as noted above, represent the primary clients of PEOs.
This study suggests PEO clients enjoy a 35 percent, or about $449 per-employee savings on HR administration, even as they enjoy a significantly higher level of services than tackling it on their own.
See the full report here.
Engaging a PEO and evaluating the budget is like buying a computer: There are many options, and it may take some evaluation based on what you are looking for. A base model PC may start at only $500, but if you are into gaming or graphic design, your computer can quickly jump to a $2,000 to $3,000 purchase after adding all the bells and whistles like hard drive space, software packages, warranty protection or super speedy processing.
PEOs can be similar, with lots of options to consider. There are companies that provide a basic service of payroll and insurance options, and that may be enough for some businesses. There are PEOs that specialize in high-risk workers compensation verticals, and some that focus on technology companies. The real price for using a PEO will vary once you do a thorough comparison.
What to Consider While Looking at PEO Pricing Models
- What are their online capabilities? Meaning, can I enroll my new-hires, make changes, run reports and conduct communication with my PEO through a secure, web-based portal? Information protection is critical these days, and if you are faxing paper forms, there is a better solution.
- How will they keep my information safe? Statement on Standards for Attestation Engagements (SSAE) No. 16 is an auditing standard that can put you at ease. Yeah, my head just started spinning trying to say that aloud, but it really is a cool thing for you and your employees if your PEO has this. It means that your information and your employees’ information (such as bank account numbers, social security numbers and insurance plan information) is kept safe and controls are audited each year by an independent third party.
- What expertise do they have on staff? Do they have Certified HR Managers, CPA’s, Certified Payroll Professionals, MBA’s, Certified Employee Benefits Specialists, Employment or ERISA Attorneys or IT Professionals? Of these areas of expertise, which are most important to your business? If it is human resources, and the PEO you are evaluating does not have a strong bench, you should probably move on.
- What am I paying for now that I can use toward my investment in a PEO? Do you have expenses for a payroll service or insurance coverages included by the PEO such as Employment Practices Liability Insurance, or EPLI? Are there expenses for time clocks and software subscriptions that will go away? Finally, how do your current costs for health insurance, workers’ compensation and 401(k) compare to the plans of the PEO? Buying power and liability reduction are key decision-making criteria for most business owners who use a PEO. Even when the numbers are similar, many owners simply want the headache and liability of managing the plans to go away.
Short-Term Cost or Long-Term Investment?
Do you consider your employees to be an expense, or an investment? Employers all across the U.S. are struggling with employee engagement, retaining employees and attracting talent. According to a 2017 report from Gallup, 51 percent of the workforce is unengaged, meaning employers have a big challenge ahead. What benefits will they provide to attract them? How much time does your internal HR team have to take care of them if they are busy working on administrative tasks?
A study conducted by McBassi & Associates found that businesses that took advantage of the benefits that most small businesses do not have access to, like health benefits, perks, retirement options, training and technology, had up to 10-14% less turnover than similar size companies who did not use a PEO. Companies that choose to invest in their employees will be the ones who grow.
Investing in your employees is critical. Investing in your business is as well. The key revenue driver in any small business is the owner(s). Is even one hour a week on transactional HR a good investment? Let us do the math: If you are a small business with $2.5MM in revenue and say a 10% profit margin, you net $250,000 a year. That means each hour of your time is worth $120. I know this is a simplistic example, and it merely illustrates that each hour of an owner or key manager’s time should be spent driving revenue.
In conclusion, PEO services can range from about $750 to about $1,500 per employee, per year. The differences will range in the level of service provided. Consider what your time is worth and ask yourself: Is relieving yourself and your team of administrative HR duties worth the investment?
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