Everyone wants to know the cost of hiring and the cost of a bad hire in particular.
The exact hiring costs depend on many factors. But researchers have looked at many companies to get an overall picture of the average costs of hiring. It is thought that the average cost of a new hire ranges from .5 to 2 times their annual salary. Bad hires incur even more costs in a short time period.
Estimates for employee replacement vary greatly. Different researchers consider different costs. The huge variety of jobs and the vastly different levels of training and expertise required also affect estimates.
Most research suggests the cost of hiring an entry-level employee is usually about 20% of their salary. Even an employee making near minimum wage can lead to turnover costs of about $3,500.
The cost of a mid-level bad hire averages $60,000, or 1-1.5 times the salary, but this depends on the exact salary and responsibility of the position.
Turnover costs of mid-level positions earning less than $75,000 are about 20% of salary, but this figure generally fails to account for opportunity cost, lost work due to vacant positions, and other serious expenses.
Executive-level hiring comes at an enormous cost. The Center for American Progress has found a cost of over 200% of salary.
In addition, the best services will also offer insurance. The Hire Talent, for example, offers with its services a three-month insurance policy – if the hire is not satisfactory or otherwise fails to work out, the position will be filled again at no additional cost.
Here are some of the most common costs of hiring:
- sourcing candidates and screening applicant resumes
- interviewing potential candidates
- reference and background checks
- advertising and job posting fees
- salaries paid to those who are involved in any of these processes
- lost production or revenue to your business due to having a vacancy
- salaries paid to those taking on extra work from the vacancy
The 9 Significant Hiring Costs:
Advertising
For a single listing varies by job board. Monster, for example, charges $375 for thirty days, while Simply Hired costs just $99 and LinkedIn charges nearly $500. Think about your audience and review each site’s offerings. Many sites offer a discount for multiple listings. If you post on three job boards, you can expect to spend $800-$1,500 a month, plus the cost of other ads.
Glassdoor recently publicized its own talent recruiting budget. As you can see from the article, Glassdoor, like many companies, does their own recruiting and hiring, spending about as much on new hire ($8,000 to $10,000) as a business might spend by using a professional recruiting service.
For businesses that can’t afford to implement and staff an entire team of professional recruiters, hiring a recruiting firm that truly partners with your business can be extremely cost-effective and advantageous.
Recruiters
An in-house recruiter makes an average of about $51,000. A month of their time represents $4,250, not to mention other expenses. Consider hiring an outsider recruiter for your hiring needs rather than keeping an in-house on the payroll. This outsources either part of or the entire hiring process so that you can ensure all bases are covered without having to stretch your own team and resources beyond comfortable limits. You’ll save money and perhaps gain some additional hiring tools or expertise through the contract.
Your Time
Hiring managers never seem to have enough time to review several hundred resumes, let alone interview 30 to 60 candidates for a position. The cost of hiring managers’ time isn’t measured in hours alone. Your productivity will decrease, even during time not focused on hiring. On average, hiring managers spend about 30 hours on resumes and interviews.
Training
Investopedia reports that the average company spends about $1,200 on training employees each year. In addition, training has a time and productivity cost. The average employee spends more than 30 hours in training each year. Plus, you must account for the salaries and time of those who assist the training. Training is important and helps ensure future productivity, but it takes time to recoup your costs – about six months.
Lost Work and Underperformers
When a position is filled by an unsatisfactory employee or is vacant, it costs you. Clients may be dissatisfied, revenue and productivity are lost, and other employees’ stress levels increase. The more important the position is, the more opportunity cost there is for bad hires and vacancies.
Having an underperformer in a role causes distress to internal team members and clients. An extreme case would be a business unit manager who creates high turnover in their group then fails. Not only do they set the team back but they incur large costs of rehiring and training new team members.
To make matters worse, the emotional cost of having to fire an underperformer is huge. Most managers spend at least 30 to 90 days before pulling the trigger to let an underperformer go. During this time that manager is less effective and struggling with an emotional dilemma.
Pre-employment Assessment Testing
Pre-employment assessment tests can save you from making the wrong hire. However, you will have to pay the cost of the testing and evaluation. Choosing tests designed with great expertise will likely cost more, but are a greater investment.
Insurance
Insurance will make up at least 15% of your total hiring cost for a new employee. Insurance will make up at least 15% of your total hiring cost for a new employee. Unemployment insurance and cobra will cost you money, especially if you have high attrition rates. Don’t overlook this factor when estimating your costs.
Legal Costs
Employees who resign or are terminated will potentially look for ways to be compensated for perceived wrongs. These legal costs can be in the tens of thousands to settle. To fight even frivolous claims could cost you hundreds of thousands. Be sure to have all your legal documentation to fight frivolous wages, unemployment, and other legal claims.
Also, find ways to help these employees terminate themselves by setting clear performance expectations, those who can meet those expectations will often let themselves go peacefully.
Awareness of the true cost of a bad hire can inspire you to take improving your hiring process more seriously.
Turnover & Employee Retention
The costs of turnover for workers can be upwards of 30% of a person’s annual salary, on average. One study revealed that for some very highly skilled or complex positions, turnover costs can reach as high as 213% of that person’s annual salary. Even positions earning less than 50k per year cost 20% in turnover, while those less than 30k per year, which make up nearly half of the U.S. workforce, can cost around 16%.
It’s no surprise then how much of a concern retaining talent can be for businesses. One study done by the Saratoga Institute found that of their 800 respondents representing 20 different industries, only 35% have specific turnover reduction plans in place, which means well more than half of their survey population have no turnover reduction policies in place to work toward retaining their employees.
How Much Are You Spending?
Check out our infographic for more insight into how these hiring costs are broken down.
We’ve also included our interactive “Cost Per Hire Guide” to help you visually understand just how much investment you make to hire someone new, and how costly hiring can be when you experience high turnover. You can replace the fields with your own estimates to determine what your costs per hire might be when you decide to start a recruiting or hiring campaign.
If you’re strapped with high turnover rates or bad hires, give us a call to discuss how implementing the best hiring practices and using assessments in your process can dramatically reduce your total costs and turnover.
