More than you’d think…..
When the need to send an employee on his way (or chooses to leave), and then replace him comes about, the various people involved often have pieces of the cost picture but don’t think about the whole cost. The hiring manager may think about the lost productivity while the position is vacant or even the cost associated with other staff taking over the workload until you rehire. HR may think about the cost of recruitment, hiring, screening and onboarding that new hire.
It’s important for everyone to have and understand all the pieces – the whole picture – in order to truly understand the costs, both hard and soft, when either a bad hire is made and must be corrected, or a good employee is not retained. This is a metric referred to in aggregate as the cost-per-hire, and is calculated as the sum of these costs divided by the number of hires. But looking at the cost of even a single instance is instructive, and even eye-opening.
It’s estimated that the cost of a new hire is 1.5 times to 3 times the salary of the position being hired. Let’s break it down.
The Cost of a Vacant Position
Calculate the cost of the people who fill in while the position is vacant. This is either the wages, or a portion of the wages of existing employees performing the duties of the vacant position, or the cost of a temporary. Be sure to factor in any overtime costs.
The cost of lost productivity could be a minimum of 50% of the prior employee’s comp and benefits cost for each week the position is vacant, even if there are people doing the work. You’d use 100% if the position is completely vacant for any period of time.
Factor in the cost of the manager who has to figure out what work remains, and plan how to cover that work until a replacement is hired.
Often forgotten in this mix is the cost of lost knowledge, skills and contacts that the former employee is taking out the door. This can be significant, even if considered a "soft" cost. Try to put a dollar amount on it. Comparing it to lost productivity, a fair estimate may be 50% of the person's annual salary for one year of employment, adding 10% for each year after that. Think about all the institutional knowledge you’ve gained, the contacts you made and think about how valuable that is to your company.
Add the cost of things like unemployment insurance premiums and the time needed to prepare for an unemployment hearing, or the cost of a third party to handle that process for you.
The Cost of Lost Productivity
While your new hire is learning the ropes, she’s not fully productive, yet. After initial training is provided, the employee is probably contributing at a 25% productivity level for the first few weeks. The cost is 75% of the new employee’s salary during that period. During the next few months, the employee is contributing at about a 50% productivity level. That cost is then 50% of salary during that period. During the next 4 to 6 month period the employee reaches 75% productivity. Add in the cost of supervisors and co-workers spending time on bringing the new employee up to speed. The new employee doesn’t really reach full productivity until the 8-9 month range.
The Cost of Recruiting
Advertising your vacant position is expensive, no matter what media you use. Print ads (newspapers, professional publications, etc.) can run from a $200.00 classified to a $5,000.00 display ad; web ads are 300.00 to $500.00. Using a headhunter? Factor in 30% of annual compensation.
The cost of the internal recruiter's or HR’s time to understand the position requirements, develop and implement a sourcing strategy, review candidates backgrounds, prepare for interviews, conduct interviews, prepare assessments, conduct reference and background checks, make the offer and notify unsuccessful candidates. This can take anywhere from 30 hours to over 100 hours per position.
Then you have the time of the hiring manager or department to review candidates, including interviews, and select a finalist.
Add in the cost of drug screens, educational and criminal background checks and other reference checks. And since all these are often done for the top 2 or 3 candidates, the costs add up quickly. Don't forget to calculate the number of times these are done per open position as some companies conduct this process for the final 2 or 3 candidates. Do you utilize any other pre-employment assessment tools? Add those in, as well.
The Cost of Training
Determine the cost of training. This will include actual cost of any external training, the time and salary of internal staff conducting orientations and training, as well as the time for any on-the-job training or instruction. Include also the cost of any training materials.
The Cost of the New Hire
Getting a new employee started involves a lot more than handing him a new hire packet and calling it a day. Think about the cost to set up computer and security passwords or and identification and access cards, business cards, email accounts, cell phones, automobiles, etc.
Cost of Salary and Benefits
Salary costs have to be bundled with benefit costs. Life, health, dental, vision and disability coverage, etc., are hard costs to consider. According to Joe Hadzima, senior lecturer at MIT's Sloan School of Management, the salary plus benefits usually totals in the 1.25 to 1.4 times base salary range. So, the salary plus benefits package for a $50,000/year employee could equal $62,500 to $70,000.
That’s some real money, there. More than enough to put careful thought and effort into hiring effectively – not just putting butts in seats – but hiring for quality and fit. It should also show you the value of retaining your best and brightest employees and just as importantly, cutting your losses when you’re faced with a non-performing or disruptive employee.