How to calculate the cost of absence
We are always commenting on the lack of focus on cost of absence. Every survey that is published shows that companies do not know what their cost of absence is. We remind business owners, FDs and HR time and again that absence is the second highest employment cost after salaries. However, it occurred to me in a conversation with a colleague recently that part of the problem is that many people don’t know how to calculate this cost. Accordingly, some companies report on their sick pay but don’t take into account other direct costs of absence. So here is a step-by-step guide to calculating your cost of absence:
Sick pay is a major cost, especially when employees get Occupational Sick Pay (OSP) as well as Statutory Sick Pay (SSP). It may well be that not all the employees in a company get OSP. Usually though, at least managers and salaried staff will be entitled to a number of days off sick on full pay.
Step one is to calculate what proportion of your staff are entitled to OSP. Record the percentage of staff that get company sick pay as FIGURE A.
Many companies tell us that their absence cost is negligible because their staff don’t get OSP. But in those companies, at least some proportion of absent employees’ shifts will still need to be covered. The slack will usually be picked up by colleagues working overtime or agency workers and there is a cost involved.
Step two is to calculate what proportion of absentees’ shifts need to be covered. Record the percentage of frontline staff as FIGURE B.
Length of a working day
This part is easy. What is the normal length of a working day at your company? Common length in the UK is 7.5 hours. Record the length of working day as FIGURE C.
Rates of pay
To complete the calculation, you need to know the average rate of pay for both OSP and agency staff or overtime. In our formula, we use hourly pay rates rather than annualised salaries because it makes more sense in calculating a cost per absence day. To convert an annual salary to an hourly rate:
annual salary / 227 (working days in a standard year) / 7.5 (hours in a working day)
Record average hourly pay rate as FIGURE D and hourly rate for replacement staff as FIGURE E.
(A * D * C) + (B * E * C) = Average cost per absence day
Or, to make the job easier for yourself, use our absence cost calculator that does it all for you!