The Workforce Costs Finance Can’t See
Labor is your largest variable cost — attrition compounds quietly
In most mid-market and PE-backed companies, labor already shows up as the largest operating expense line. Analyses of operating expense structures regularly estimate that workforce costs can account for 60–70% of total operating expenses in many organizations.
Finance sees that weight very clearly in the P&L.
What’s harder to see are the costs that don’t sit cleanly on a GL line:
The true all-in cost of each employee
The compounding effect of attrition and vacancy
The productivity drag of low engagement and constant churn
The “shadow costs” of manager time, rework, and lost opportunities
Those costs are real, material, and often decisive for value creation—especially on PE timelines.
This is the layer of workforce cost that most standard finance views miss.
The Visible Slice: What Finance Already Sees
Finance has a clear handle on the direct workforce costs:
Salaries and wages
Overtime and shift differentials
Employer payroll taxes
Benefits contributions
Contractor and contingent invoices
Guides on labor cost accounting and payroll analysis break this down cleanly and offer formulas for calculating total hourly labor cost.
This is necessary—but incomplete.
Multiple analyses of “true employee cost” point out that by the time you include benefits, taxes, overhead, and some level of turnover, the all-in cost of an employee is often 1.25–2.0+ times base salary, and in some cases up to 2.4x.
So the first blind spot is simple:
The GL shows wages. The business carries the economic cost of the person.
But the bigger blind spot is dynamic, not static.
The Hidden Slice: Costs That Don’t Look Like “Labor” Yet
1. Turnover as a Compounding Cost, Not a One-Time Hit
Turnover gets framed as an HR problem. Financially, it’s a compound-interest problem.
Recent reviews estimate the cost of replacing an employee at anywhere from 50% to 200%+ of annual salary, depending on role and level, once you include recruiting, onboarding, training, ramp time, and lost productivity.
Those estimates capture:
Hard costs: ads, agency fees, recruiting time, background checks, sign-on incentives
Soft but measurable costs: lost output during vacancy, lower productivity during ramp, errors, and rework
Now multiply that by persistent attrition.
Example (simplified on purpose):
200-person organization
Average salary: $80,000
Voluntary attrition: 15% (30 people per year)
Replacement cost: 1.5× salary (a conservative assumption)
Per departure: $80,000 × 1.5 = $120,000
Thirty departures: 30 × $120,000 = $3.6M per year
Those dollars are not labeled “turnover cost” anywhere. They show up as:
Recruiting expense
Training and onboarding
Overtime to cover the gap
Missed sales, delayed projects, slower customer response
From a finance perspective, attrition is a multi-line drag on EBITDA that will keep compounding until the underlying drivers change.
And that’s before you account for concentrated attrition—when exits cluster in critical roles or locations.
2. Vacancy, Understaffing, and Overtime
When a role is open:
Revenue may be delayed or lost
Remaining staff pick up the slack, often via overtime
Quality and customer experience can slip
Labor-cost guides emphasize that overtime and premium pay are key components of total labor cost, but the cost of vacancy itself rarely has its own line.
Over time, the pattern looks like this:
Understaffing drives overtime and burnout
Burnout drives turnover
Turnover creates more vacancies, and the cycle continues
Finance can see the overtime line. It can’t easily see the flywheel.
3. Engagement as a Financial Variable, Not Just a Survey Score
There’s now a long trail of research connecting employee engagement and well-being to:
Higher productivity and quality
Lower absenteeism and turnover
Better customer satisfaction and profitability
Some studies report organizations with high engagement enjoying double-digit lifts in profitability and productivity, along with materially lower turnover.
From a cost perspective, low engagement behaves like a hidden tax:
People are physically present but mentally checked out
Teams rely on a smaller subset of high performers (“the dependable few”)
Change takes longer, with more resistance and rework
Those effects show up in:
Slower project delivery
Higher error rates
More management time spent chasing follow-through
None of that sits neatly in “labor cost,” but all of it changes the cost of labor per unit of output.
4. Manager and Leadership Time
Every hire, exit, performance issue, and reorganization absorbs manager and leadership bandwidth:
Writing and re-writing role specs
Interviewing
Onboarding and coaching
Addressing conflict or performance problems
Management and HR articles routinely remind leaders that people-management time is one of the largest—and least measured—components of labor cost.
The opportunity cost is substantial:
Hours not spent with customers, on strategy, or on cross-functional work
Slower decision-making because key leaders are deep in “people fire drills”
On the P&L, that time is just “salary.” Economically, it is capacity diverted away from value-creating work.
5. Structural Issues That Inflate Labor Cost
Finally, there are structural design choices that quietly increase workforce cost without obvious red flags:
Misaligned spans and layers (too many small teams, too many managers)
Heavy use of premium contingent labor where more stable roles would be cheaper over time
Inefficient scheduling patterns in operations and service roles
Under-investment in training and process design, driving higher rework and error rates
Guides on workforce cost analysis frame these as hidden drivers that only surface when HR, finance, and operations look at people data together.
Individually, each design choice can look like a reasonable local decision. In aggregate, they materially shift cost per unit of output.
Why This Matters So Much for Mid-Market and PE-Backed Companies
For mid-market firms and portfolio companies, workforce cost isn’t just “big.” It’s:
The largest variable cost lever in the model
A major source of execution risk on growth, integration, and transformation
A key driver of valuation—both via margins and through perceptions of operational maturity
Analyses of operating expenses in people-heavy organizations emphasize that when workforce costs represent 60–70% of OPEX, even modest improvements in how that cost is structured can have outsized impact on profitability.
Conversely:
Persistent turnover in critical roles
Chronic overtime and burnout
Weak linkage between engagement and financial performance
…will quietly erode the investment thesis, even if headline headcount and salary budgets look “on plan.”
Making the Invisible Workforce Costs Visible
The goal isn’t to turn every leader into a labor-cost analyst. It’s to give finance, HR, and operations a shared, more accurate view of the real cost of the workforce.
Here’s a pragmatic way to start.
1. Move From Salary to All-In Cost by Role Band
Use a simple but realistic multiplier for each major role band:
Base salary
Employer taxes
Benefits
Typical overhead (space, tools, basic training)
Multiple sources put this all-in cost in the 1.25–1.5× salary range for many roles, and higher for specialized positions.
You’re not trying to be perfect. You’re trying to get close enough to make better trade-offs:
FTE vs. contractor
Location choices
Span-of-control and org-design decisions
2. Put a Price on Turnover—By Segment, Not Just in Aggregate
Use conservative assumptions (for example, 1–1.5× salary per departure) and calculate:
Annual cost of turnover company-wide
Cost of turnover in critical segments (revenue-generating roles, hard-to-hire skills, key sites)
Recent reviews of turnover cost support this range and emphasize how much of it is hidden in indirect effects.
Then ask:
Where is attrition structurally high?
Where would a 3–5 point reduction in attrition meaningfully move EBITDA?
This reframes “retention” from a soft HR concern into a hard financial lever.
3. Connect Engagement and Well-Being to Financial Outcomes
You don’t need a perfect model, but you do need a clear story:
What is the current state of engagement or well-being?
How does it correlate with turnover, absenteeism, and performance in your data?
What would be the financial impact of moving key groups from “at risk” to “healthy”?
Syntheses of engagement research consistently show strong links to productivity, profitability, and retention.
Once finance sees those relationships with your own numbers, investments in management capability, workload design, and employee experience become easier to evaluate.
4. Build a Joint HR–Finance View of Workforce Cost
This isn’t about a new system. It’s about a shared model.
Workforce cost-analysis guides recommend combining:
Direct labor data from HR and payroll
Indirect cost signals (overtime, injury, error, rework, customer issues)
Turnover and vacancy metrics
Engagement or well-being measures
Even a first-generation view will highlight:
Teams where cost per unit of output is out of line
Places where retention focus would have the highest financial payoff
Structural design choices that carry the largest hidden cost
Where Guarden Labs Fits
This is exactly the kind of problem space where Guarden Labs does its best work.
Instead of treating workforce cost as a static budget line, labs help leadership teams:
Turn financial and HR data into a shared picture of visible and hidden workforce costs
Identify a small set of high-leverage questions (for example: “What happens to EBITDA if we reduce attrition by 5 points in these three roles?”)
Design time-bound experiments—around retention drivers, staffing models, or workload design—and measure the actual financial impact
Build repeatable ways for finance and HR to look at workforce costs together, not in parallel
No promises of magic savings. Just disciplined experiments that replace guesswork with evidence.
Final Thought
Finance already knows labor is the biggest cost.
The opportunity—and the risk—live in the costs you can’t see yet:
The compounding math of attrition
The drag of disengagement and burnout
The structural choices that quietly inflate cost per unit of output
You don’t fix that with another spreadsheet or another round of “do more with less.”
You fix it by seeing the system more clearly and testing your assumptions about how people, work, and money actually interact in your business.
If you want to move from a narrow view of “payroll expense” to a sharper, shared understanding of workforce economics, try a Guarden Lab or email contact@bloomguarden.com and we can talk through what that would look like for your organization.
References
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(HRStacks, 2025). The True Cost of Employee Turnover (And How to Reduce It).
(HRD Connect, 2023). Operational Expenses: The Critical Metric for a Greater Connection Between HR and Finance.
(Lano, 2023). What Is the True Cost of an Employee?
(OnPay, 2025). Understanding Labor Cost: Labor Cost Formula, Calculations, and Examples.
(Paycor, 2024). A Closer Look at Labor Costs.
(PeopleThriver, 2025). How Employee Engagement Affects Profitability.
(Small Business Administration, 2019). How Much Does an Employee Cost You?
(SynergySuite, 2025). Understanding Labor Costs: Fixed vs. Variable Breakdown.
(Visier, 2025). 5 Tactics to Reduce Operating Expenses Through People Analytics.
(Acciyo, 2025). How Much Does an Employee Cost Calculator.
(Virtual Latinos, 2025). How to Calculate the Cost of an Employee: Salary & Benefits.
(U.S. Bureau of Labor Statistics, 2025). Productivity and Costs by Industry: Selected Service-Providing Industries.
(Harvard Business School, 2019). Employee Well-Being, Productivity, and Firm Performance.
(Lucid, 2025). Employee Engagement vs. Financial Performance.
