The Cost of Hiring a New Employee

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. In its 2016 Human Capital Benchmarking Report, the Society for Human Resource Management estimated that companies spend an average of 42 days to fill a position and $4,129 per hire.

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 William G. 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.

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 an average of $1,286 a year on training per employee in 2019. During the same year, employees devoted an average of 42.1 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 and 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.

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 returning office workers during the coronavirus 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 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 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 on 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 12: The level goes up to 50% productivity, with corresponding cost of 50% of the employee’s salary.
• Weeks 13 through 20: In this timeframe, the employee usually reaches a productivity rate of up to 75%, with the cost being 25% of the employee’s salary.
• Around the five-month mark: Companies can expect a new hire to reach full productivity.

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.