How to Calculate the True Cost of Hiring Employees
Arriving at the actual cost of finding and hiring new talent involves truly understanding the process from start to finish. And while some businesses may go into the hiring process somewhat blind, knowing the true cost of hiring can help you identify where it makes sense to cut costs—as well as where it would be wise to spend more. After all, a bad hire is ultimately a lot more costly. Ultimately, it’s better to avoid scrimping and saving and get it done right the first time around.
The best way to determine your cost per hire is by breaking the total cost down into its component costs. Once you do that, it quickly becomes evident which costs are optional and which are nonnegotiable.
The Cost of Hiring
According to a report by the Society for Human Resource Management (SHRM), employers dedicate an average of $4129 and 42 days to filling a position. Of course, your cost of hiring will vary depending on the length of the search, the nature of the role being filled, and the salary range. The question is, how much should you be spending?
Typically, employers should spend somewhere in the range of 16 to 20% of their hire’s annual starting salary. Entry-level positions will be a lot closer to the low end of that range. That being said, this is just a rough guide. There are numerous reasons your costs may end up being significantly higher or lower. For instance, the search for someone to fill just one highly technical, specialized and/or in-demand role can be quite lengthy, requiring more support and a larger budget. On the other hand, if you’re looking to fill 25 identical positions at the same time, it’s a lot easier to share costs across numerous hires, potentially reducing the cost per hire by a wide margin. In a similar vein, if you hire for the same role regularly, it becomes easier to perfect your process over time.
From internal costs like HR salaries, employee relocation, and applicant tracking software, to external costs like agency fees and advertising costs—the list of hiring expenses is long. And while not all costs will apply to your business, it’s surprisingly easy to underestimate the true cost of hiring.
Let’s break down some of the most significant costs associated adding new members to your team.
1. The Cost of Recruiting
There are various potentially hefty costs associated with the process of recruiting the right candidate. These include promoting the job listing far and wide, for starters. It’s also important to take into account the time spent by internal recruiters, assistants who help review CVs, the employees conducting interviews, as well as those conducting drug screens, background checks, and other pre-employment assessment tests. Using quality recruitment software is one potential way of expending less time (and therefore money) during this process!
It’s also worth considering that while different types of hires naturally require different processes, even an employee applying for a position at a minimum salary could end up costing your business a significant amount in turnover costs.
2. The Cost of Training
Once recruited, new hires don’t tend to be completely and immediately productive. Realistically, it may take several months for them to become accustomed to the new flow. Of course, once a new hire is behind the wheel, companies also need to do all they can to facilitate the transition to healthy productivity. How? By providing employee training, of course.
Although proper training is crucial, it turns out that it’s also one of the steepest investments you’re apt to make. Your typical business might lose anywhere between 1% and 2.5% of their total revenue in the time required to get a new employee up to speed. In 2019, companies spent an average of $1286 a year on training—per employee. And new hires devoted an average of 42.1 hours to undergoing this training. To truly get a handle on training costs, it’s important to consider all the costs associated with structured training, materials, as well as the time cost of managers and coworkers.
3. The Cost of Workplace Integration
Yet another set of costs that shouldn’t be glazed over is workplace integration. More and more these days, businesses are tuning in to the needs of their employees—beyond simply providing a decent enough chair and desk. Effective workplace integration might extend to carving out meaningful space for a new employee within the company, or on the production floor.
Helping them fit in and get along with other staff is also an essential aspect of integration. There are also a number of material needs that may need to be met as well. These may include customized employee software, a company cell phone, travel funds, a company vehicle, and any special equipment required to get the job done—or facilitate it.
Of course, in some businesses, these considerations are a lot more integral than in others. An IT employee working in telecommunications, for instance, is more likely to require specialized equipment than someone whose job takes place 100% in-office, or in an industry that’s more standardized production-wise. Additionally, in the age of Covid-19, it’s also worth considering the cost of potential safety adaptations required in workplaces.
In today’s cutthroat job market where employees have the upper hand, attracting and retaining top talent is essential to your company’s success. But before you hire someone new, understanding your break-even point is key. While hiring a new employee is often costly, it’s typically worth it, because they bring in more profit than what they cost. But this is not to say you should be dismissive of the cost of hiring.
Ultimately, it’s never a bad idea to conduct a thorough cost-benefit analysis. While not every employee will end up as profitable as they appear on paper, a comprehensive assessment certainly reduces your risks. Because even when there’s behind-the-scenes disagreement about the best approach to hiring (if any), profits remain the undeniable driver of your business!
Once you have a detailed breakdown of all you can and should spend on a hire, you can get down to the business at hand: bringing the right people on board.