How much does it truly cost to hire a new employee? That is what I’ll uncover for you in this post.
The costs obviously depend on the position, the company, the industry and many other factors, but scientists have actually done a very good job figuring it out for us.
Let’s get to it!
But before we dive head first into the shallow end of the pool (or break our spine on the frozen water… 😂) we need to sort out some details.
Costs associated to hiring.
Some might think only of recruitment costs. That’s fair. But we want to evaluate the total cost of hiring a new employee. The division that many scientists have used is:
- 🔎 Search costs (read: recruitment costs).The cost associated with job posting, sourcing, screening, interwieving and everything else associated with filling the position.
- 👟 Adaptation costs (read: onboarding and training costs).The costs associated with a new employee going through onboarding, formal training and the initially low productivity for the first months.
- 💁 Disruption costs (read: ad-hoc guidance costs).The costs associated with an employee disrupting their colleagues for ad-hoc informal training, guidance and the support required.
The reason we don’t want to forget the adaptation costs (onboarding and training) and the disruption costs (ad-hoc guidance) is because the recruitment cost is only 21% of the total cost of a new hire. 😯
The biggest reason onboarding and training is so costly is because it includes the initial low productivity of employees.
Ad-hoc guidance and support is 26% of the total cost because the average employee “interrupts” productivity for 96 hours in companies with fewer than 50 employees and 112 hours in companies with over 50 employees.
Although that sounds shockingly high, it is actually on par with previous scientific research on the subject. Barron et al. (1997) found that every new hire interrupts for 87.5 hour as part of them getting up to speed.
Now, that this is clear. Let’s move on to the total costs.
New hires can easily cost $40.000.
The cost of hiring a new employee especially depends on the position.
As you can see from the chart below, IT specialists cost 22 weeks of salary to hire while a retail store assistant or mechanic cost 10 weeks of salary.
22 weeks is equal to a little over 5 months.
So, if the employee’s monthly salary is a good round $8.000 then the total hiring cost is a little over $40.000.
The paper was published in 2018 and a lot of the data is older. However, the competition for talented employees has only become more fierce, and I would argue the costs are at least at the same level, if not higher, today.
That makes a good case for working proactively with retention.
Employee cost as a percentage of turnover.
You can make very big spreadsheets with advanced calculations on lost productivity, lost knowledge, time until position is filled and vacant costs.
But I don’t think you need to do that necessarily.
The easiest way to estimate the cost of employee turnover is to analyze how many employees you actually lose on an annual basis, and calculate how much it costs to re-fill those positions.
Imagine we are a 100 person company with a rather normal turnover rate of 25% per year. We lose 25 employees every year.
Each employee has a cost that we already know is 5 months of salary in knowledge heavy positions, and 2-3 months for “easier” positions.
So if the average wage is $6.000 dollars, the per employee turnover is $30.000.
We lost 25 employees so the cost of turnover is $750.000 per year!
You cannot have 0% turnover - at least not sustainably. But companies should strive, and invest, in decreasing their employee turnover.
How can you decrease employee turnover costs?
Studies from Gallup have looked at data from 52 industries and +2 million employees to understand how employee engagement impacts employee retention.
Teams or units that are in the top quartile (25%) of engagement have:
- 65% less employee turnover
- 37% less absenteeism
- 22% higher profits
- 10% higher customer satisfaction
Compared to teams and units in the bottom quartile.
Those are the results we all want. Am I right?
Increasing employee engagement is clearly one of the most important (if not the most important) factor to ensure you retain more employees.
The true cost of an employee.
You can calculate the true cost of an employee in many different ways.
What are you trying to achieve? If the goal is to make a business case for investing in your employees well-being and engagement, then the model proposed in this blog post should suffice.
If you are doing a budgeting exercise, then factoring in other aspects like office costs, equipment, lunch, upskilling and so forth. That’s a topic for a different time.
Want help making the case?
If you want help making the case to your CFO, then book a demo with me and I’d love to support you with all our tools and ROI calculators.