Part of the reasons that cash-strapped businesses hesitate to start hiring, even when they need employees, is due to the actual cost of hiring. It's easy to forget that an employee, in terms of cost, means more than just the salary which can be substantial all by itself. But add in the cost of recruiting, training and more, and the dollars start growing. (Save time and money by following these tips to a smooth career transition. Check out 6 Steps To Successfully Switching Financial Careers.)
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The Cost of Recruiting
The cost of simply finding the right person to hire can be hefty. Business advisor, William G. Bliss names various, potentially high costs in the process of recruiting alone: advertisement, time cost of internal recruiter, time cost of recruiter's assistant in reviewing resumes and performing other recruitment-related tasks, time cost of the person conducting the interviews, drugs screens and background checks, and various pre-employment assessment tests.
Not every new hire will demand the entire process, but even an $8/hour employee can end up costing a company around $3,500 in turnover costs, both direct and indirect.
The Cost of Training
Recruitment is just the first step in the process; once the right person is in place, businesses need to provide adequate training so the new employee can do the work and start producing for the company. Training turns out to be one of the costliest investments a company can make. In a report from Training magazine in 2007, companies spent an average of over $1,200 annually per employee. In 2005, employees spent an average of 32 hours per year on training. And those aren't necessarily only new hires who would not only require the same on-the-job training and continuing education as current employees, but the additional hours and cost of orientation and initial job training.
Entrepreneur and consultant, Scott Allen defines a simple way to understand training cost: "Calculate the cost of both structured training (including materials) and the time of managers and key coworkers to train the new employee to the point of 100% productivity."
The Cost Of Hiring A New Employee
The Cost of Salary + Benefits
The obvious cost of a new employee - the salary - comes with its own bundle of side items, as well. Benefits range from the minor - free coffee - to the major such as gym memberships, life insurance, disability coverage, dental plans, tuition reimbursement... the list goes on. According to Joe Hadzima, a columnist for the Boston Business Journal and 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." Hence, the salary plus benefits package for a $50,000/year employee could equal $62,500 to $70,000. (Focusing on salary may be a mistake. Find out which benefits have the highest long-run payoff. Check out Job Hunting: Higher Pay Vs. Better Benefits.)
The Cost of Workplace Integration
Another seemingly minor point shouldn't be overlooked; workplace integration, from assigning the new hire a desk to fitting him or her onto the right team of peers, can be costly. Businesses are looking at more than simply providing a computer and an ergonomically designed desk chair; there's also the cost of physical space as well as software, cell phone, travel and any special equipment or resources required for the job.
The Break-Even Point
So all this investment leads to increased production, hopefully, at least that's why businesses make the investment. But it can take a while for the cost to get covered and companies to see a return on their investment. According to the Studer Group, "A survey of 610 CEOs by Harvard Business School estimates that typical mid-level managers require 6.2 months to reach their break-even point."
Bliss breaks down the productivity scale into three periods: during the first month or so, after training is completed, new employees are functioning at about 25% productivity, which means that the cost of lost productivity is 75% of the employee's salary. The level goes up to 50% productivity for weeks 5 through 12, with corresponding cost of 50% of employee salary. Weeks 13 -20 usually bring the employee up to 75% productivity rate, with the cost being 25% of employee salary. Around the five-month mark, then, companies can expect a new hire to reach full productivity.
The Bottom Line
According to Eric Koester of MyHighTechStart-Up, "estimates range from 1.5x to 3x of salary for the 'fully-baked' cost of an employee - the cost including things like benefits, taxes, equipment, training, rent, etc." Hiring a new employee isn't a decision that should be taken lightly, as it doesn't fall lightly on the company budget. But without workers, there isn't much work done. And that's the bottom line for businesses; even though the investment may make the company accountant cringe, the potential in return on a good new hire continues to make the investment worthwhile. (Here are five warning signs that you might be nearing your final days. See 5 Signs You're About To Be Fired.)