How much does a new hire cost you? There’s a lot of information out there on this topic, and lots of studies and estimates trying to answer this question. On the surface level, it seems like an easy answer that can be answered in simple dollar amounts.
Recruiterbox estimates that hiring a new employee can cost $5,000 or more in a professional or a manufacturing industry and $1,000 in a service industry.
When replacing a salaried employee, Zanebenefits estimates the cost to be around 6-9 months salary of the position in question for recruiting and training costs. This amount will increase depending on the difficulty of the job position. For example, the cost to replace the CEO of a company is going to be much higher than that of an entry-level employee.
However, as we dive deeper into the question, there are actually a lot of factors that recruiters need to consider when recruiting a new hire. To start, let’s review all the different costs associated with hiring a new employee.
Typical New Employee Costs
The typical process involves a complicated process going through advertising, reading resumes, interviewing, and onboarding. All of this ends up costing your company, not to mention the salary paid out for time and energy spent by recruiters and managers to make the decisions on hiring.
The longer this takes, the more it’s going to cost! An easy way to lower costs at this stage is to use a talent pool such as the one available with ProSky. Recruiting from a group of already trained candidates and the ability to put them through performance-based challenges can quickly help you make a decision on the best fit for your company.
This is a basic cost that most hiring managers do take into consideration in new hires. Something not taken into account is that productivity in new hires is considerably lower when they first start. Although you may be paying them the same amount as a previous employee, do not expect the same level of return until time has passed. It takes an estimated 1-2 years for new hires to reach the same productivity level as the original person.
A possible solution to this is to consider a tiered pay system in your succession pathway. This system is more common in high turnover industries but could be applied to great effect if expectations are clarified properly during the hiring stage.
A great example of this is Buffer’s Bootcamp where new employees are paid as contractors for the first 45 days of the job to make sure they’re a good fit with the company. If they perform well, they are then hired on as full-time full-salary employees with all the benefits.
Start new hires at a lower pay and increase it as they progress along their career pathway and reach certain milestones. Make a timeline and expected salary growth clear from the very start so that new hires are incentivized to reach their goals and complete the trial period.
Dental, healthcare, Retirement portfolios… These costs should be considered depending on what benefits your company offers and when they are made available to employees. Benefits help with employee retention, increase employee loyalty, and motivate them to work harder.
In the tiered system, benefits can be added in as new hires hit timeline milestones with the company. Knowing what they can look forward to as they work longer encourages retention. Don’t withhold benefits for too long though or else employees might start looking elsewhere!
Training and Development
Most of these estimates don’t even begin to account for the training and development costs afterward too. After the hiring, you have the cost of onboarding the employee. This can include setting them up with email, equipment or software that the company uses, and the time it takes to become familiarized with the company’s process and culture.
IT efforts and time
Costs of a computer, phone, etc.
Training on job duties
Setting high-level expectations
Training on company processes
Workplace culture exercises
Intros to clients, partners, consultants, etc.
Ongoing feedback & mentorship
The cost of onboarding averages around $400. The ongoing feedback and mentorship can quickly add up though. When a new employee starts working for your company, someone who is experienced likely needs to teach them the responsibilities of the position. When you factor their time into the equation and you may be looking at paying 2 people to do one job!
A good suggestion to improve the onboarding process is to formalize and automate the system as much as possible. Having a structured training pathway in place that new hires can reference allows them to grow in the company at their own pace and frees up your other employees from the training process. Just be sure to check-in and follow up with your hires regularly to make sure they are adjusting well.
In Summary: new hires aren’t cheap! Most sources agree that the combined costs of hiring and training will cost at least half of the position’s salary or more. Of course, hiring is a necessity in any growing company and must eventually be done. To help you get past hiring pains, we’ve compiled some more great ways to help you save on hiring.
Ways to save on the Cost of New Hires
The best way to avoid unnecessary and costly hiring process is to keep the employees that you already have! Improving your company culture and transparency to improve the relationships you have with your employees.
Prevention is the best cure! Retaining the talent you have will do wonders in saving on costs because you won’t have to worry about them suddenly hopping ship and end up scrambling to fill the holes.
Promoting from within your company instead of hiring from outside is by far one of the most effective ways to save on hiring. By considering your existing employees for a higher position, you completely skip the hiring stage and most of the training as well. Furthermore, they are already assimilated into the company culture and familiar with your company’s processes.
In an article by Forbes, studies estimate that external hires typically make more than internal promotes for the same job position. External hires also score worse on performance reviews and are 61% more likely to be fired. It takes about 2 years for the external hire performance reviews to reach the same level as internal promotes, but some don’t make it that long.
In short, why pay more for someone who may not perform as well, and is more likely to leave when instead, you can train and promote someone familiar with your company to fill the position the way you want it filled? By promoting from within, you are able to restrict hiring to entry-level positions as your experienced employees fill the important upper ranks.
Manage Employees growth with Pathways
Providing a succession plan in your company is a great way to see which positions and responsibilities need filling in your company. Having one helps with both employee retention and internal hiring.
Because Succession pathways can be customized to fit employee interests and skills along with your company’s needs, It allows employees to pick where they want to go in the company ranks as they grow. This allows your company to adapt new situations as it grows to include new job positions and responsibilities.
When I started working with ProSky, I got to sit with my manager to plan my path based on the company’s needs, but also with my interests and existing skills in mind. These discussions give me specific milestones to hit through the progression: skills to obtain and goals to work for; and incentives for completion
By streamlining the hiring process, improving onboarding, and hiring from within the company, you will be able to lower hiring costs and avoid some costs entirely. The last piece of advice when it comes to hiring is “Don’t rush it”. Doing it right the first time will keep you from having to start all over again!
Although hiring costs a lot, having an empty position or keeping a bad employee can be even worse for the company. Try using ProSky to recruit great talent for your company today. You can test-drive candidates using our performance-based hiring projects and manage the way your employees progress in your company through our Pathways feature.