Cash-strapped businesses often hesitate to start hiring, even when they need workers, due to the actual cost of hiring employees. It's easy to forget that the cost of taking on a new employee means more than just their salary, which can be substantial all by itself. But once you factor in the cost of recruiting, training, and more, the dollars start adding up.
- The cost of hiring an employee goes far beyond just paying for their salary to encompass recruiting, training, benefits, and more.
- Companies spent over $92 billion in 2020-2021 on training.
- Integrating a new employee into the organization can also require time and expenditures.
- It can take up to six months or more for a company to break even on its investment in a new hire.
- Benefits should account for an employee's investment requirements, not just that employee's salary.
The Cost Of Hiring A New Employee
The Cost of Recruiting
Just the price of finding the right person to hire can be hefty. There are various potentially high costs just in the process of recruiting, according to business consultant Bill Bliss, president of Bliss & Associates Inc. These include advertising the opening, the time cost of an internal recruiter, the time cost of a recruiter's assistant in reviewing resumes and performing other recruitment-related tasks, the time cost of the person conducting the interviews, drug screens and background checks, and various pre-employment assessment tests.
Not every new hire will require the same process, but even an $8/hour employee can end up costing a company around $3,500 in turnover costs, both direct and indirect. Using the right tools, such as the best recruitment software, is one way that recruits can save time and money during this step.
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.
According to a recent study by Training Magazine, companies spent $92.3 billion in 2020-2021 on training. During the same year, employees devoted an average of 64 hours to 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, cost of orientation, and initial job training as well.
Entrepreneur and consultant Scott Allen provides 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 Salary and Benefits
The obvious cost of a new employee—the salary—comes with its own bundle of side items. Benefits range from the minor, such as free coffee in the employee break room, to the major, such as life insurance, disability coverage, medical and dental plans, tuition reimbursement...the list goes on.
According to Joe Hadzima, a columnist for the Boston Business Journal and 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." Hence, the salary-plus-benefits package for an employee who makes $50,000 a year could equal $62,500 to $70,000.
These costs can also unexpectedly rise if the new hire is injured on the job, which can be especially costly for smaller businesses. For this reason, it's important for workplaces to ensure that they are working with one of the best small business insurance companies.
The Cost of Workplace Integration
Another seemingly minor point shouldn't be overlooked: Workplace integration, from assigning the new hire a desk to placing them with 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.
Expenditures may also change as a result of adaptations required for the safety of office workers returning during the pandemic. Many of these are in the process of being explored now.
The Break-Even Point
The goal of all this investment is increased productivity—at least that's why businesses make the investment. But it can take time for the costs to get covered and for companies to see a return on their investment. A survey of 210 CEOs by Harvard Business School estimated that typical mid-level managers require 6 months to reach their breakeven point (BEP). In other words, a mid-level manager has to be on the job for more than six months for the company to earn back its investment in that hire.
Bliss breaks down the productivity scale into three periods:
- Roughly the first month: 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.
- Weeks 5 through 8: The level goes up to 50% productivity, with a corresponding cost of 50% of the employee's salary.
- Weeks 9 through 12: In this timeframe, the employee usually reaches a productivity rate of up to 75%, with the cost being 25% of the employee's salary.
- Following the 12-week mark: Companies can expect a new hire to reach full productivity.
How Much Does It Cost To Hire a New Employee?
Hiring a new employee costs more than just their salary. Benefits and other compensation like equity should be considered, as well as the considerable time investment employers make when they hire someone. It depends on the nature and investment of the new hire, but it can be six months or more before the employer sees a positive return on their investment in the employee in the form of full productivity.
How Do You Calculate the Cost on an Employee?
An employee can cost a lot more than just their salary. An employer needs to not only consider an employee's base salary and benefits, but also the payroll taxes they have to pay, any equipment that the employee needs to perform their job, any expensive training materials the employee needs, and the loss of productivity while the employee is learning or being trained. The reality is that even the most skilled workers need time to adjust to new processes and bosses, and this is done on the company's time (and dime).
Should You Pay Employees in Stock Options?
Paying employees in options is something many companies do in order to entice top talent. A high base salary is the first consideration for many employees, but offering stock options can not only get an employee to sign on, but can both lower your initial investment as an employer and offers the employee the chance to cash out their options at a future date for hopefully significant gains. Stock options, especially when tied to an employee's performance, can also increase productivity as that employee's performance can increase their future payout.
The Bottom Line
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, so 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.