The cost of hiring a new employee is something that must not be overlooked and needs to be strategically calculated and planned.
As a recruiter, your whole job is about finding and grooming employees for other businesses. Unfortunately, most business owners, don’t really grasp the investment they are making when hiring a new employee, and this lack of knowledge hurts your career.
They may not understand how much you have to charge them, why you want to make the choices you do, or how to nurture the quality candidates you give them for maximum success on everyone’s part.
These realizations cannot be made without a proper understanding of the cost of hiring a new employee. It will also prevent you from making desperation hire and save even more resources. Therefore, in this text we will include everything that goes into the cost of hiring and training a new employee:
- The overall cost of hiring a new employee
- Costs of unengaged workforce
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This quote from the SHRM pdf on Employee Turnover describes it very well:
“Research suggests that direct replacement costs can reach as high as 50%-60% of an employee’s annual salary, with total costs associated with turnover ranging from 90% to 200% of annual salary.
Examples include turnover costs of $102,000 for a journeyman machinist, $133,000 for an HR manager at an automotive manufacturer, and $150,000 for an accounting professional.
If these estimates strike you as high, keep in mind that in addition to the obvious direct costs associated with turnover (such as accrued paid time off and replacement expenses), there are numerous other costs.”
Of course, the costs vary depending on the role.
For employees making $30,000 a year or less, the cost of replacing them is 16% of their annual salary. For the next salary bracket, $50,000, it goes up to 19.7%, and for $75,000, it becomes 20.4%. That’s a bit alarming.
What is truly scary is the cost to clients who need more highly educated and specifically skilled workers with high salaries. High turnovers for these positions can reach more than 200% of the employee’s annual salary. That is not a typo. That’s equivalent to mistakenly paying three times for one item.
It is also difficult to pinpoint the cost of hiring an employee because there are so many indirect expenses. These costs are rarely obviously connected to hiring and definitely not tracked, but they hurt the company nonetheless.
Hiring costs (direct and indirect) include:
- Event and agency fees,
- Recruiting efforts or external services,
- Drug screening, background checks, etc.
- On-boarding/initial training,
- Hours other employees spend interviewing and training the new employee,
- Continual training,
- Cost of medical coverage and other benefits,
- Unfilled job duties/help while filling a position,
- Lowered productivity of a new employee,
- Dampened morale in high-turnover situations,
- Poor customer service and workmanship in high-turnover situations.
Additional good read: Signs you’ve made a bad hire and what to do about it, without losing more.
Do you use recruiting software? If not, costs associated with the overall hiring process can be quite expensive. Manpower to go through paperwork, advertisements, reviewing resumes, and more can be extensive.
There are also other things to factor in as well:
- Staffing agency fees
- Interviewing time
- Hiring assistant
- Drug tests
- Calling and talking with references
- Background checks
- Assessment testing
It’s possible that even with recruiting software to help with these tasks, you could be looking at around $2,000 per new hire. Without software, solution costs could be upwards of more than $3,000.
If you are curious, here you can read how to calculate the ROI of an applicant tracking system. You can also check our post on free applicant tracking systems in case you are really tight on budget.
Whether the client recruits for themselves or hires you to recruit for them, sourcing itself requires some combination of advertising, hours of human resources, fees, and software.
Some of the costs included here are:
- Job boards fees – This shouldn’t be overlooked, as LinkedIn takes $1.20 to $1.50 per single click on your job ad, and Monster takes $375 for 60 days and $395 for 90 days for one position. ZipRecruiter starts at $249 for one month for 3 positions, whilst Dice is priced at $395 for one job post for 30 days.
- Career events – Sometimes you have to get out and attend numerous fairs and events in order to attract the right candidates. The average cost of participating in these events ranges from $125 to $225. Keep in mind that this doesn’t include travel and accommodation fees.
- Marketing – Recruiting almost equals marketing, thus be prepared to take all marketing fees into consideration when calculating the costs of hiring.
Interviewing candidates also requires hours of hiring managers’ or recruiters’ time, and sometimes clients have to cover travel expenses for the interviews.
All of these separate costs go together to put a pinch on the client’s proverbial pocketbook.
To ensure you stay on top of the game, check out our post on Common Mistakes to Avoid When Hiring Sales Representatives.
Training an employee is a crucial but expensive process. One must take the time to:
- plan what training must be done,
- purchase materials,
- pay for someone to perform the training,
- pay the employee for the hours of training,
- and miss out on time when both the current and new employees are engaging in other, more directly profitable, activities.
It also takes employees some time to gain the experience and confidence in their new role to offer the company their full benefit. This equates to buying a new piece of equipment and waiting for it to “pay for itself.” As a result, the company has invested more money in that employee for a period of time than they’ve received from them in worth.
Investopedia sets a pretty bleak length of time for reaching this “break-even point.”
Bliss breaks down the productivity scale into three periods:
- After training is completed during the first month or so, new employees are functioning at about 25% productivity, which means that the cost of lost productivity is 75% of the employee’s salary.
- The level goes up to 50% productivity for weeks 5 through 12, with a corresponding cost of 50% of employee salary.
- Weeks 13 -20 usually bring the employee up to a 75% productivity rate, with the cost being 25% of employee salary. Around the five-month mark, then, companies can expect a new hire to reach full productivity.
So, a company could retain an employee and spend those five months with a trained, fully-productive employee or lose one, spend the hiring costs and wait for them to reach their full potential.
Or worse, in high-turnover situations, a company might invest in an employee and never reap the full benefit before that one quits and it’s time to hire another employee. Both of these situations are representing a lot of waste.
In addition to the employee’s salary, you must also factor in benefits. The list of benefits most companies include can range from the following:
- Vacation pay
- Tuition reimbursement
- Sick pay
- Personal time off pay
- Life insurance
- Health care coverage
- Gym memberships
- Free coffee
- Disability coverage
- Dental plans
According to Joe Hadzima, MIT professor, companies should multiply the salary range by 1.25 to 1.4 in order to get the full cost of compensation. For example, if a new hire’s salary is fifty thousand a year, you should expect to spend around sixty to seventy thousand a year on actual total compensation costs.