How much does it cost to hire an employee?
The National Association of Colleges in America found out that the cost of hiring an employee in a company with 0-500 people averages $7,645. Other studies such as the one published by the Society for Human Resource Management in the USA, estimated that the average cost of hiring an employee is $4,129, and $14,936 for hiring an executive.
Bringing new employees into your organization requires costs that include both direct costs and costs associated with the time and effort spent during the process. It is important that organizations get a clear picture of the expenses associated with hiring a new employee for better financial planning. But how to determine these costs in the most accurate way?
Recruitment costs include direct costs (the recruitment process itself) and indirect costs (the rest, related to the process). The cost of a company’s employee includes not only the total salary of the employment contract and the related employer’s social charges but also the costs related to the recruitment and integration process. Hiring someone who isn’t a good fit for the job must also be included in the calculation.
Calculation of the direct cost of a new hire
To define the direct cost of an employee for the company, you should consider the following elements:
Gross salary: Salary stated in the employment contract. Understanding your employee’s gross pay is critical since gross wages are required to calculate the amount of taxes and deductions that must be made, particularly if deductions are based on a percentage of the employee’s gross salary.
Benefit costs: The 2019 Benefits Benchmarking Report, prepared by The Conference Board of Canada, indicates that benefits represent an average of 10% or about $9,000 of an employer’s total costs in compensating an employee. These benefits include paid time off, supplemental pay, insurance, retirement plans, mental health coverage and savings plans.
Employer charges: These include health insurance, unemployment contributions, supplementary pensions, and professional training. Depending on the country of the incorporation of the company, these charges can range from approximately 18% to 26% of a worker’s base salary (CNN Business).
Calculation of the indirect cost of a new hire
When evaluating the overall cost of hiring employees, you should consider indirect costs such as:
Costs related to the recruitment process: It is necessary to consider the hourly cost of the different recruitment actors multiplied by the time spent for each phase of the recruitment (writing the job offer, choice of the means of diffusion of the job offer and diffusion, analysis and sorting of the received applications, interviews, choice of the selected candidate according to different criteria, etc.).
Costs related to the integration process: Once the candidate has been chosen, other costs related to the integration (or onboarding) will necessarily be incurred, such as the preparation of the employment contract, medical examination, and preparation of the work equipment. The integration process also entails other costs:
- Training costs: training and preparation of a new hire begins when a new employee enters your company and ends once she or he is fully capable of doing work on their own. According to Training Magazine report, large companies increased overall training expenditures to $22 million in 2020 from $17.7 million in 2019, while small companies increased from $367,490 to $506,819. Although training and development of an employee is an ongoing process and should never be stopped to guarantee personal and skills development of each employee and his or her capability to perform new tasks.
- Unproductivity costs: new hires don’t always provide their maximum effort straight away. This means that an employee’s productivity may be lower for the first two years after they start working. Companies will be missing out on potential value for months or years after their former employees have left.
Costs related to wrong recruitment: The ” wrong recruitments ” will cause additional costs such as the implementation of the termination of the contractual relationship and other administrative documents related to the termination, the operation of loss related to the added value not received by the company during the entire period of unproductivity of the employee as well as the additional costs related to the launch of a new recruitment and integration process to replace the wrong recruitment.
The Society of Human Resource Management (SHRM) in collaboration with the American National Standards Institute (ANSI) created a generalized cost-per-hire (CPH) formula:
To discover more about the cost of hiring and employee retention in the Human Resources field, EDLIGO team has interviewed HR Leaders about their experiences and opinions.
Here are some great insights:
Head of HR Data & Analytics at CrowdStrike
Why is it more beneficial for the company to retain employees than to hire new ones?
The question has a lot to it, but I’d say it’s beneficial to retain because of all the downstream impacts that aren’t immediately obvious when an employee is at risk of leaving. I’d first start and say, normalize stay conversations to understand and gauge when an employee may be susceptible to external offers. And then work with them to understand if what they are seeking is something feasible. Retaining is often cheaper in the long run. The number 1 reason employees leave is compensation or career development based. If that’s what the employee is looking for and they are top talent. Retain them. Otherwise, you will lose productivity when they leave. This is a cost. You will burn out those who need to cover for the loss, which may lead to more turnover, more cost. Recruiting is not cheap for a company. It involves marketing, paying the recruiter for their time, interviews which cost productivity. And then ultimately when a replacement is identified companies are having to pay a higher salary than the prior incumbent. And then there’s ramp-up time and onboarding costs. So, in the end, giving the prior incumbent a 10-15% raise and new title would have been cheaper than the recruitment cycle.
Head of People Analytics at PerkinElmer, Inc.
Why is it more beneficial for the company to retain employees than to hire new ones?
Many leaders receive a sticker shock at the hard, quantifiable costs of hiring. The people and infrastructure that power Talent Acquisition are sizable and the more employees you need to backfill the larger these “hard costs” will be. However, this is only a fraction of the true costs associated with an organization’s inability to retain talent – in many cases the “soft costs” of high attrition might outweigh the ones leaders see on paper. The expense of internal knowledge drain, time spent interviewing, lost productivity of empty positions, onboarding costs, and ramping-up the productivity of new hires are immense. Financially speaking, you’d often be better off recognizing and retaining the employees you have than going to market for replacement talent.
People Analytics at Wayfair
Why is it more beneficial for the company to retain employees than to hire new ones?
Attrition in a company comes with extra costs. One of the costs would be time spent to interview and time spent to onboard the new hire. Let’s assume a mid-senior role has a notice period of 2 months and it requires another 3 months to interview candidates and to have the new person join and that onboarding takes 3 additional months. That means that the team will have to hold for around 8 months waiting for the replacement and for the person to be onboarded. Another cost is lack of productivity in work due to missing headcount during all this time. This also comes with a risk of the remaining team feeling burned out due to handling extra work while searching for a replacement. Finally, hiring comes with a risk. You will not know for sure if the person hired will be right for the job and fit in the company culture until they go through their first review. If the company would have spent time and resources to retain the person in the first place, it would have maintained or increased engagement and productivity in the team and saved itself a lot of extra hours, effort and risk to hire a new person. By focusing on employee development, the company can increase retention and upskill existing teams so that they continuously strive for new ambitious business goals.
People Analytics Analyst at Healthfirst
Why is it more beneficial for the company to retain employees than to hire new ones?
When companies are successful at retaining employees, they can maintain a level of organizational knowledge which maintains organizational efficiency. When an organization loses their staff and hire new employees there is a 3–6-month learning curve where efficiency is lost due to the “catching up” the new hire must undergo costing an organization loss of profit.
Within our organization we have been able to calculate a total loss of 3.6million dollar loss in 2021 due to our voluntary turnover. We can calculate this combining recruiting cost, onboarding/training cost and loss of productivity
Global HR Analytics Specialist at ROCKWOOL Group
Why is it more beneficial for the company to retain employees than to hire new ones?
It is a matter of time and time is money. Capitalizing from hiring processes as well as counteracting turnover costs is of utmost importance for organizations, whatever the industry and the size are. Moreover, whenever a job contract is signed, further related costs follow such as those related to the newcomer onboarding and training. Indeed, companies invest a lot of resources to make the newcomer more and more effective in contributing to the organizational business. Thus, the newcomer starts to familiarize with his/her tasks, role, job, people, and the work environment, all of that require a significant investment of one’s personal and structural resources. Consequently, it is quite easy to imagine that deploying a sustainable employability strategy may be more beneficial for both the employees – whose needs of growth are satisfied – and the employer – who don’t need to restart (and re-pay for) the hiring and the onboarding process once again. Retention policy as well as sustainable employability interventions have already shown their efficacy on employees’ health and productivity (Hazelzet et al., 2019).
Hiring an employee involves a significant cost for the employer. To drastically reduce recruiting and onboarding costs, it’s best for companies to opt for internal recruitment. Companies sometimes overlook a promising talent base: their own employees. It’s time for recruiters to focus on internal recruitment, employee training, and developing the skills needed for the future. To assist these processes EDLIGO offers AI-Powered People Analytics solution for data-driven and cost-effective talent management.
– EDLIGO allows managers to evaluate the skills and competencies of their employees. EDLIGO platform provides you with a map of people’s skill gaps, and, on this basis, managers can use recommendations on how to fill the skill gaps in the most efficient way for their organizations. Companies will be able to create a strategy for improving and renewing employees’ skills so that they can save the cost of hiring new people.
– EDLIGO enables structured and targeted talent mobility. The EDLIGO platform allows you to search for talent internally and create personalized development plans for employees in your company who need to advance.
– EDLIGO platform helps companies identify top performers and future leaders in the organization, uncover great skills in the company, develop employees for the future, increase retention rate, and maximize employees’ engagement.
In summary, recruitment of an employee entails a significant cost for the employer. Far from being obvious, the calculation of the cost of recruiting an employee includes both direct costs (the recruitment process itself) and indirect costs (the rest related to the process).
To learn more about our solutions to minimize the cost of hiring by retaining the best talent, please schedule a call with our EDLIGO team.