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.

How To Optimise All Your Hiring Costs

1) External team

If your company is one which relies on external recruiters/agencies, the number that would mostly speak of when discussing recruitment costs, is the external expenditure on hiring – typically 15-30% of a candidate's annual salary (higher if you use an executive search company). Now assuming that you decide to sign a contract with an external recruiting agency with a typical invoice value per hire at 22%, and the candidate has an annual salary of USD60,000, the data suggests that the amount would be around USD13,200.

This is as far as most companies look, so when costs need to be controlled (because of external global events like recession/pandemic/poor market conditions), they will only rely on agencies if they have too many roles to fill, which leads to the company not seeing success or facing an urgent situation to fill open roles.

GRIT Talent Platform only costs USD999 per role. That's a total of 92% of saved costs, in comparison with the external agencies:
USD13,200 - USD999 = (USD12,201/USD13,200) x 100 = 92%

2) Internal team

There are also companies which seek to reduce their headline costs by bringing recruitment activities in-house, reasoning that if they hire the recruiters themselves, they can cut out the agencies. However, it’s worth noting that even in-house recruiters can fail to source most, if not all, of their vacancies themselves, and therefore may need agencies to help in the end. Furthermore, your internal HR team would have a lot more on their plate than just hiring, so working out their costs per hire is a bit trickier. Here’s how you can do it though:

  • Make sure you're aware of each HR person's hourly salary. If you're not sure, you can turn to a variety of salary-to-hourly tools out there to help you. Let's take for example a USD60,000 salary, which breaks down into around USD29 per hour.
  • From there, you can then work out how many hours it may take for your HR team to hire a new employee. That includes everything from posting the job ad right up to completing an offer.
  • Be warned: This won't be a number you’ll know right away, but you’ll get a rough idea over time. Let’s use 40 hours as our example, and that your HR team has three people. With that in mind, 40 hours x USD29 x 3 = USD3,480 – that’s your internal HR team cost for that hire.

But if you made use of GRIT Talent Platform, it'll only cost USD999 per role, so that's a whopping total of USD2,481 saved (71%) if you utilise the service!

3) Time to hire

Most companies do track how long it takes to hire people, but completely ignore it as a cost factor. But, it’s actually a huge overhead! Given the typical reactive recruitment environment, the average hiring time is usually about 36 to 42 days, during which time the role is unfilled. For that period, there’s either no productivity, or productivity is provided by someone else, likely the manager. This has a tangible cost, and if the hiring timeline slips, the cost then goes up.

So, if we were to take that maximum number of 42 days (6 weeks) as a rough benchmark, according to data for the United States alone, the average vacancy costs employers a staggering USD4,129 over that period (the time it typically takes to fill an open position). This breaks down to just over USD98 per day, plus any additional funds allocated towards recruitment. Now, imagine if you had 10 roles to fill!

There are a couple of ways you can impact this cost, though. Firstly, by moving away from the purely reactive model and understanding your recruitment demand, you can then plan your recruitment proactivity, which makes a significant difference. This can reduce the typical hiring period by another few more weeks. 

For the best results, you can take this further and operate through GRIT Talent Platform. By proactively sourcing candidates through our Tech Platform before they’re needed, and actively managing them, you can cut hiring times to 2-3 weeks on average, with a huge resultant savings of USD4,129/2 = USD2,064.50.

4) Cost of productivity loss with planned hiring

Assuming that an employee earns USD50,000 annually, with a productivity cost of 3x salary:

Average time to hire: Planned hiring6 weeks
Total productivity lossUSD17,308

You can still see how the GRIT Talent Platform’s 2-3 week hiring period can save your productivity losses with a properly planned hiring process.

5) 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! 

GRIT Talent Platform will help you streamline your process as it’s all online/digital so you can manage your pipeline effectively and with ease. Using our automated interview scheduling and interview feedback, you’ll be able to cut time spent on managing the recruiting process by 70% on average.

6) 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%.

GRIT Talent Platform's unique candidate funnel system ensures that there’s a consistent stream of active talent for you to select from, with our active candidates database growing 300% month-on-month. GRIT Talent Platform boasts a carefully curated list of talent that has been gathered from across the tech and digital industries. We'll help you tap into various sites on top of sourcing, gathering, and filtering – thus allowing you to enjoy a pool of unlimited high-quality talent.

7) 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. 

GRIT Talent Platform tackles this, by having a longer runtime to engage with candidates adding an additional screening tier; including culture-fit and behavioural questions before putting the candidates into your shortlist. The result is a reduction in the typical twelve-month drop-out rate of up to 90%.

Ready To Start Hiring Effectively And Efficiently?

In short, the true cost of hiring is not just how much you pay for recruiters (whether internal or external), agency fees, and ads. That's only the tip of a sizable iceberg that impacts every facet of your company's performance and productivity. 

A fairly typical hire can cost well over twice that, in combined headline and hidden costs (even based on average figures), and whether you use agencies or in-house recruiters the bottom line is the same: Hiring costs approximately double the salary. 

By using our GRIT Talent Platform, where there's a combination of online digital recruitment pipeline management as well as unique proactive sourcing channels of active and curated talent, only then will you be able to drive down time-to-hire (cut hiring times to 2-3 weeks on average, with a huge resultant savings), reduce costs to hire (total of 92% and 71% of saved costs, in comparison with the external agencies and internal HR team respectively), cut time spent managing (by 70% on average), as well as lower the attrition rate (reduction in the typical twelve-month drop-out rate of up to 90%).

This is the most effective and efficient way you're really going to address the fundamental issue of recruitment costs!

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