December 19, 2022

What Is The True Cost Of Hiring An Employee?

There’s a saying by Steve Jobs which goes: “It’s not the tools you have faith in – tools are just tools – they work, or they don’t work. It’s the people you have faith in or not.” He knew that one very important secret, which is that your business will only ever be as good as your employees. When you need to run a company and make critical spending decisions that can either make or break you, one of the most important decisions that can help in driving your company to new heights is hiring the right people.

It may seem like a daunting task; having to filter through hundreds of hopefuls, shortlist the ones with the greatest potential, run through multiple interview sessions, and then select the one who’s (hopefully!) the best fit. It can even seem scary when you find out there’s research which proves that hiring the wrong people will actually pose a significant cost to your company. For example, the average cost of a bad hire is estimated to range from 30% to 150% of an employee’s annual salary (re-hiring costs, lost productivity, lost manager time, lost training investment, training of replacement).

From the receptionist desk to the executive offices, every single one of your employees represents a facet of your business to clients, and to the community at large. Which is why when you make the wrong hiring decision, that can cost you more than just money, such as the following:

1) Time

Every new employee will need some form of training, and time to acclimatise to the job. The wrong person won’t be able to grasp the job scope and responsibilities quickly enough, and may even decrease productivity, especially if he/she requires frequent follow-ups, retraining, and even disciplinary action. As time is money, you shouldn’t have to worry about whether your employees are getting the job done (and done right), or holding their hand for as long as they work there.

2) Company image

When you hire someone who’s wrong for the job, not only will you and your business suffer, your company’s image may take a beating too. This is because what people say about you and/or your company does matter – and you wouldn’t want word to get around that there’s a high turnover rate, because that’s not a place most jobseekers want to join. Additionally, you wouldn’t want the bad hire to go around talking negatively to either existing employees or outsiders about their experience.

3) Business growth

If someone doesn’t want to grow with you, they’re essentially working against you, and that’s the last thing you want on your plate when you’re trying to focus on growing the business. You want people who are able to help you in not only contributing to the company’s overall success, but working to stabilise and improve the business, as well as reducing the need to rehire – over and over again.

4) Team morale

Let’s face it, having so many people come and go in such a short period of time may have an adverse effect on the existing employees because it can cause them to feel uneasy and/or unsettled. Furthermore, a bad hire is able to sow discord and cause tension among their teammates and other departments, where it may not have even existed before, thus causing an upset in the daily workflow, overall people connectivity, and company culture.

What Are The Typical Costs Of Hiring An Employee?

1) External recruiters

For many small- to medium-sized companies, having a dedicated in-house HR team won’t make much fiscal sense, which is why many opt to turn to external recruiters to facilitate hiring. With only a small team, every new hire is crucial for the company’s success, so turning to an outside expert who has a talent pool of qualified and experienced candidates as well as an array of tools and resources to draw upon is often the preferred choice. However, bear in mind that external recruiters/agencies have various pricing structures which can quickly add up, no matter whether it’s in the form of a role’s annual salary, retainer-based, or flat rate.

2) HR team

It’s true that an experienced and skilled Human Resources (HR) team is a crucial asset for any company’s recruiting efforts. Even if you’re only able to hire one dedicated HR person at a time, the tasks that will need to be carried out for the hiring process are valuable: Setting up the job posts, putting them out on job boards, screening and selecting the candidates, assessing and interviewing them, all the way to making an offer and training them. But wait, they have more than that to do too, such as drafting corporate policies and procedures, which is why all this can come at a high cost.

3) Job board postings

Now that you’ve got the best in-house HR person/team ready to start hiring for you, you’re going to have to start getting those job posts out in the open. Writing a compelling ad is no small task, and it can make the difference between attracting the top talent, or just another average person who needs a job. When it comes to boards to post, there are several free options to consider like LinkedIn and ZipRecruiter, but those come with limited features. Other popular job board options that charge for you to use them include Indeed, Monster, CareerBuilder, and Dice.

4) Screening/background checks

After you’ve got a shortlist of who you think are the “right” candidates, you need to screen and run background checks before making an offer to one of them. First up, a lot of time will go into discussing with various department heads to whittle the list down further, and setting up screening calls. Then the background check lets you learn about them more by verifying basic information like the individual’s education and previous employers, right up to criminal databases, so that you have peace of mind that they’re as good as they seem. 

5) Onboarding and training

Did you know that your new hire’s onboarding and training process would need to be factored into the total cost of hiring an employee? Here’s a rough example for you to consider: According to a report by Training Magazine, it would “cost” companies an average of 46.7 hours to train an employee, plus an additional USD986 in training expenses. Apart from that, there are also IT equipment costs (laptop/desktop, work phone, WiFi dongle, etc) and formal training costs (in-person/online courses, onboarding materials, etc) to factor in. But don’t worry, the training you provide is to get the new hire up to speed quickly, and prepare him/her to make key contributions! 

6) Salary and compensation

Once the new hire has accepted and signed the job contract, it’s time to start paying their monthly salary when they begin work – which is the more obvious cost associated with hiring. When calculating your ongoing cost to hire though, make sure you also consider the taxes, benefits (like health insurance, retirement plans and employee growth initiatives), and bonuses (if relevant). You also need to bear in mind that most employees will expect their salaries to rise over a period of time, usually in line with their work contributions and keeping with your country's inflation.

7) Other acquisition methods

Apart from the most common methods of job boards or external recruiters/agencies, there are other methods which can prove successful, such as referrals, your website’s job availability page, or attending/hosting career/industry events. While it’s not easy to create an effective and enticing referral programme, the high-quality candidates it can generate actually makes it a great recruiting tool for many companies because you’ll be relying on the network of your existing employees, which can turn up many top talent yet untapped. As for the other methods, they too may have an associated cost, all of which must be taken into due consideration.

An In-depth Look Into Actual Acquisition Cost

There are two main costs to look at — cost of recruiting and cost of dislocation due to hiring time. On top of that, there's also a variable — time to hire that will affect how the cost is being calculated. Let's dive into it:

Cost of Recruiting

Typically, working with a recruitment agency will cost you an average 22% of the employee's annual salary. Meanwhile, if you are utilising in-house HR resources to help with the recruitment, considering the amount of hours and tools like job boards that are used, it will cost you an average of 12% of the employee's annual salary.

Say you are looking to hire a Senior Software Engineer with an annual salary of $84,000. This will amount to:

  • Agency fees = $18,480 (22% average)
  • In-house recruitment = $10,080 (12% average)

Time to Hire

Many companies underestimate the financial impact of the hiring process duration. Typically, it takes 10 to 12 weeks for a role to be filled, depending on the route they took to hire, be it in-house or with recruitment agency. The wait time will result in either no productivity or the need to redirect resources or hire contract labor.

Cost of Dislocation due to Hiring Time

As mentioned above, if this is a role that requires immediate productivity, we will need to factor in productivity losses and/ or contractor cost. For the same role of Senior Software Engineer with an annual salary of $84,000, productivity of 2x salary, and contractor rates of $50/ hr; we can roughly estimate the additional cost incurred during the hiring process.

Avg time to hire10 weeks12 weeks
Productivity loss$32,307$38,769
Contractor cover$20,000$24,000

Total Cost of Hiring

Based on the cost of recruiting, time to hire, and cost of dislocation due to hiring time, we can roughly gauge the total cost of hiring that is so much higher than what we have anticipated in the past. Here's a summary of the total cost of hiring a Senior Software Engineer with an annual salary of $84,000:

Cost of recruitment$18,480$10,080
Cost of dislocation$20,000 to $32,307$24,000 to $38,769
TOTAL$38,480 to $50,787$34,080 to $48,849

Other Potential Cost

1) Management time

Another major cost is the time which is spent by whoever is involved with managing the recruitment process; they’re tasked with specifying roles, reviewing CVs, arranging interviews manually, collecting feedback and, as over 50% of offers made are rejected, they then have to repeat the process! 

2) Quality of talent

We’ve already discussed that almost all recruitment solutions are reactive, which is the act of sourcing candidates only when the need arises. The immediacy of that need means that companies are entirely reliant on candidates already in the market: Signed up with agencies, looking at ads, on job sites, or on databases. But studies have shown that this only represents around 20% of the qualified candidates in the marketplace, and even then, to access all of that you have to use every agency, database, and advertising medium.

A limited access, to only people who really want or need a new job, has a dramatic impact on the quality of talent. Most companies know that the candidates who apply to their job post(s) are irrelevant, which still significantly reduces their talent pool. If a company is able to access the wider pool of talent, as is achieved by the GRIT Talent Platform, there’s a demonstrable improvement in quality of talent, and as a result, an evident increase in productivity per head of between 10-30%.

3) Attrition

Finally, up to half of new hires leave within the first twelve months, and the average is over 20%. The reasons are simple: The 6-8 weeks of contact with a company during a standard recruitment process is not enough to develop a cultural rapport between candidate and company. In short, the new hire starts work and then only finds out if they do ‘fit in’ or otherwise, any concerns they may have are amplified by the pressure of the new job. 

Reduce Your Cost to Hire with GRIT

In short, the true cost of hiring is not just how much you pay for recruiters (whether internal or external) but also include loss of productivity costs and more. An unplanned and unoptimised hiring process can result in the hiring cost soaring well above five times to eight times of their monthly salary.

At GRIT, we understand the importance of keeping the cost low when it comes to hiring. And with that, we have came out with an incredible solution — GRIT Talent Platform, where our AI-powered talent platform allows you to achieve the below:

  • Cost of recruiting = $999
  • Time to hire = 3 weeks
  • Cost of dislocation = $6,000 to $9,692
  • Total cost of hiring = $6,999 to $10,691

With GRIT Talent Platform, we are able to reduce your hiring cost by a whopping 80%! It is achievable when our intuitive talent platform with support of our experienced talent advocate team are able to source, curate, and qualify talent for any roles in just 3 weeks! With our recruitment fees of just $999 and an incredible fast time to hire, GRIT Talent Platform is the most effective and efficient way you're really going to address the fundamental issue of recruitment costs!

Join over 500 companies that are hiring (effectively and efficiently) with GRIT!

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