Cash-strapped companies are often hesitant to start hiring, even when they need workers, due to the real cost of hiring employees. It’s easy to forget that the cost of hiring a new employee means more than just their salary, which can be substantial on its own. But once you factor in the cost of hiring, training, and more, the dollars start to add up. In its 2016 Human Capital Comparative Report, the Society for Human Resource Management estimated that companies spend an average of 42 days filling a position and $ 4,129 per hire.
- The cost of hiring an employee goes far beyond simply paying their salary to encompass recruiting, training, benefits, and more.
- Small businesses spent, on average, more than $ 1,500 on training, per employee, in 2019.
- Integrating a new employee into the organization can also require time and expense.
- It can take up to six months or more for a company to cover its investment expenses in a new hire.
The cost of hiring
The price alone of finding the right person to hire can be high. There are several potentially high costs just in the hiring process, according to business consultant William G. Bliss, president of Bliss & Associates Inc.. These include the opening publicity, the time cost of an internal recruiter, the time cost of a recruiter’s assistant in reviewing resumes and performing other recruiting-related tasks, the time cost of the person who conducts interviews, drug screenings and background checks, and various Pre-Employment Screening Tests.
Not all new hires will require the same process, but even an $ 8 / hour employee can end up costing a company around $ 3,500 in turnover costs, both direct and indirect.
The cost of training
Hiring is just the first step in the process. Once the right person is in place, companies must provide the right training so that the new hire can get the job done and start producing for the company. Training turns out to be one of the most expensive investments a company can make.
According to a recent Training Magazine study, companies spent an average of $ 1,286 a year on training per employee in 2019. During the same year, employees spent an average of 42.1 hours on training. And those aren’t necessarily just new hires who would not only require the same on-the-job training and continuing education as current employees, but also the extra hours and cost of initial job training and orientation.
Entrepreneur and consultant Scott Allen provides a simple way to understand the cost of training: “Calculate the cost of both the structured training (including materials) and the time of key managers and co-workers to train the new hire up to 100% productivity point. “
The cost of hiring a new employee
The cost of salary and benefits
The obvious cost of a new hire, salary, comes with its own package of child elements. Benefits range from the minor, like free coffee in the employee lounge, to the senior, like life insurance, disability coverage, medical and dental plans, tuition reimbursement … the list goes on. According to Joe hadzima, a Boston Business Journal columnist and senior lecturer at MIT’s Sloan School of Management, salary plus benefits typically total “in the range of 1.25 to 1.4 times base salary.” Therefore, the salary plus benefits package for an employee making $ 50,000 a year could equal $ 62,500 to $ 70,000.
The cost of workplace integration
Another seemingly minor point should not be overlooked: workplace integration, from assigning a new employee a desk to placing him with the right team of peers, can be costly. Companies are looking for more than simply providing an ergonomically designed computer and desk chair; There is also the cost of physical space, as well as software, cell phone, travel, and any special equipment or resources required for the job.
Expenses may also change as a result of adaptations needed for returning office workers during the coronavirus pandemic. Many of these are in the process of being explored now.
The point of balance
The objective of all this investment is to increase productivity, at least that is why companies make the investment. But it can take time to cover the costs and for companies to see a return on their investment. According to the Studer Group, a survey of 610 CEOs by Harvard Business School estimates that typical mid-level managers require 6.2 months to break even (BEP). In other words, a mid-level manager has to be on the job for more than six months for the company to recoup its investment in that hire.
Bliss divides the productivity scale into three periods:
- About the first month: Once the training is complete, new hires operate at about 25% productivity, which means the cost of lost productivity is 75% of the employee’s salary.
- Weeks 5 to 12: The level rises to 50% of productivity, with the corresponding cost of 50% of the employee’s salary.
- Weeks 13-20: In this period of time, the employee usually achieves a productivity rate of up to 75%, the cost being 25% of the employee’s salary.
- Around the five-month mark: Companies can expect a new employee to reach maximum productivity.
The bottom line
Hiring a new employee is not a decision to be made lightly, as it does not fall lightly on the company’s budget. But without workers, not a lot of work gets done, so while the investment may make a company’s accountant cringe, the potential in exchange for a good new hire continues to make the investment worthwhile.