How do PEOs Price their Services?

It's no secret: business owners struggle with HR. In fact, 70 percent of small businesses delegate HR tasks to employees with "little to no experience" with HR issues, and 81 percent of those employees aren't confident in their ability to perform HR duties. Unsurprisingly, over 40 percent of small businesses end up paying payroll fines each year, most (+50 percent) are unsatisfied with their HR capabilities, and two-thirds have job openings they simply can't fill. 

So, it shouldn't come as a surprise that hundreds of thousands of businesses turn towards outsourced HR partners, like Professional Employer Organizations (PEOs). While the average ROI of using a PEO is around 27.2 percent, not all PEOs use the same pricing mechanism.

There are two popular PEO pricing models: Percentage of Payroll (POP) and Flat Rate Per Employee Per Month (PEPM). So, which one of these pricing methods is better for your company? Is there a hybrid model that gives you the best of both worlds? How do you pick the pricing model that gives you the best "bang for your buck?” 

PEO Cost Savings 

Before we tackle PEO cost models, let's quickly take a moment to discuss how PEOs save businesses money in the first place. After all, there's no point in a cost comparison if you don't understand the core value associated with a PEO partnership. In general, PEOs create value across 3 key buckets:

• Payroll: Did you know that 49 percent of employees start looking for a new job after just 2 payroll errors? Not only do 40 percent of small businesses pay fines for payroll errors, but many create angry employees, tax issues, and stacks of paperwork in the process. PEOs completely take over your payroll duties, giving you room to focus on growth, sales, marketing, and other core objectives. 

• Employee Benefits: PEOs also save businesses significant money on benefits through the power of "economies of scale." Get this: small businesses pay nearly 20 percent more for health insurance than their larger counterparts (and the insurance is usually worse!) Why? Simple. Large businesses have a larger pool of employees to bring to the negotiating table. PEOs can combine employees from all the businesses they partner with. So, instead of trying to negotiate with your small pool of employees, PEOs negotiate with employees from all the small businesses in your area. The result is better benefits for less money. 

• Workers' compensation: Chances are, you will deal with workers' comp issues on a relatively regular basis. You can expect ~1 - 2 claims per 50 employees per year. Dealing with the nuances of workers' compensation can be challenging. From paperwork and daily minutiae to workers' comp strategies aimed at reducing employee injury time, PEOs help reduce the cost of workers' compensation insurance. 

Some businesses get more value out of PEOs than others. This is related to pricing models. Choosing the right pricing model for your business is a huge component of your overall return on investment. 

Two Popular Pricing Models 

Let's quickly cover the two core pricing models PEOs use in the United States. 

Percentage of Payroll 

In this model, PEOs charge your company a percentage of your total payroll or gross payroll, depending on the PEO. This is the most "popular" PEO model. And for many businesses, this model makes sense. If you employ many part-time employees with lower compensation, paying a percentage of your gross payroll can be highly cost-effective. However, many businesses employ multiple positions and pay ranges. And some businesses operate in higher-paying industries than others. The higher your overall employee compensation is, the more you pay in this model. 

Per Employee Per Month 

In this model, PEOs charge your company a flat fee for each employee on your payroll. This model works perfectly for companies with highly-compensated employees/executives or those that use hefty performance bonuses. However, employees that employ many employees with lower compensation may overpay using this model. 

Hybrid Pricing: The Best of Both Worlds 

Most businesses have multiple types of employees, multiple payment structures, and variable compensation across positions. Chances are, you employ a few "C" level people or employee types with higher compensation. And you likely have a core team with lower compensation (at least, comparatively). So, does either pricing model really make sense?

At Navigate, we offer a "hybrid" pricing model. We use percentage of payroll (POP) for low-wage employees and per employee per month for highly-compensated employees. Why? Because it matches your real needs. Small businesses reach out to PEOs to help them solve problems, save money, and create growth — not to overpay them based on overly-simplified pricing arrangements. 

Where to Find Hybrid Pricing 

Currently, Navigate is the only PEO with a hybrid pricing model. Our goal is to contain costs, minimize risk exposure, create HR excellence, and alleviate administrative benefits without negatively impacting your bottom line. Your growth is our growth. Don't work with a PEO that uses your company as a profit center. Work with a PEO that wants to create a partnership based on mutual growth.