Hiring an employee is one of the most important investments a company can make, but its not cheap.
Hiring employees is one of the most important investments any business can make. In fact, in a Harvard Business Review survey of 800 business leaders, more than 95 percent said hiring and retaining talent was in their top three priorities, and more than two-thirds of respondents said filling open positions was essential to their organization’s ability to compete in the future.
However, recruiting and hiring the right candidates can be expensive. Employers must factor in the costs associated with the internal or external HR team members conducting the recruiting and factors such as background screenings, job postings, compensation, training and equipment. Knowing what costs to expect when you’re hiring can help set up your company for long-term success.
Recruiting new employees is an expensive yet necessary process for companies to grow and thrive. But many organizations underestimate exactly how much it costs to recruit and hire a new staff member. When factoring in both hard costs like job board fees and soft costs like productivity losses, the total cost of recruitment can be staggering. In this comprehensive guide, we’ll break down the major components that contribute to the cost of recruiting and provide tips for keeping your hiring budget under control.
Hard Costs of Recruiting a New Employee
The hard costs of recruitment refer to the direct, quantifiable expenses related to hiring someone new. These include:
Job Advertising
- Posting job ads on sites like Indeed, LinkedIn, and industry-specific boards
- Promoted social media posts targeting passive candidates
- Print/radio/TV ads in local media outlets
According to the Society for Human Resource Management (SHRM), companies spend an average of $1477 on job advertising per position.
Recruiters/Staffing Agencies
- Fees for external recruiters and staffing agencies to source candidates
- Travel costs if recruiters need to attend job fairs or conduct on-site interviews
On average organizations pay recruiters around 20% of the new hire’s first-year salary.
Pre-employment Assessments
- Personality tests, skills assessments, drug tests
- Verification checks like employment history and education
- Hiring incentives like sign-on bonuses
SHRM estimates companies spend about $261 per applicant on assessments.
Interviewing
- Staff time spent screening resumes, conducting interviews, debriefing
- Travel/lodging costs for out-of-town candidates
- Technology needs like video conferencing tools
Interviewing requires significant staff time, with an average of 14 hours spent per hire.
Soft Costs of Recruiting
The soft costs of recruiting refer to indirect, harder to quantify expenses like:
Productivity Losses
When an employee leaves a role, it takes time to find and onboard their replacement. This leads to workflow disruptions and lost productivity. The more critical the role, the greater the impact.
Training Costs
Once hired, new employees require extensive training to learn systems, processes, expectations. This takes manager and coworker time away from normal work.
According to the Association for Talent Development (ATD), businesses spend an average of $1,286 on training for each new hire.
Cultural Impacts
Integrating a new team member takes time and impacts office culture. Poor hiring decisions can be very detrimental in this area.
Opportunity Costs
Recruiting requires HR staff to take time away from more strategic projects and initiatives focused on the long-term health of the organization.
Calculating the Total Cost of Hiring a New Employee
When adding up both hard and soft recruiting costs, the total cost to hire comes out to a staggering 2-3x the new employee’s salary on average.
Let’s look at a real example. Say you need to hire a Sales Associate with a $50,000 annual salary. The major costs would include:
- Job advertising: $2,000
- Recruiter fee: $10,000 (20% of salary)
- Assessments: $300
- Interviewing: $5,000 (based on staff time spent)
- Training: $1,500
- Lost productivity: $10,000
- Cultural impact: Difficult to quantify exactly but very real
In this scenario, the total cost of hiring the new Sales Associate would be around $28,800. For a $50,000/year role, that’s a staggering 57% of their annual salary spent on recruiting!
And remember, this is before even factoring in ongoing expenses like salary, benefits, payroll taxes, office space, equipment, etc. No wonder hiring new employees represents a major investment for employers.
Tips for Reducing Recruiting Costs
While hiring costs are unavoidable, there are ways companies can streamline the recruitment process and keep budgets under control.
Refine Your Hiring Process
Identify any redundant or inefficient steps in your current system and look for ways to refine it. For example, using structured interviews and eliminating unnecessary rounds of interviews can greatly reduce costs.
Leverage Technology
AI-powered chatbots can screen applicants 24/7. Video interviews allow out-of-town candidates to meet hiring managers remotely. Applicant tracking systems centralize all candidate data. Use technology to optimize recruiting whenever possible.
Develop an Employee Referral Program
Employee referrals are one of the fastest, most cost-effective sources of quality hires. Offer incentives to current staff for successful referrals.
Prioritize Retention
It’s always cheaper to retain an employee than replace them. Survey your staff, address any concerns, and foster an engaging work environment. High retention saves enormous recruiting costs.
Partner With Schools
Develop relationships with technical schools, colleges, and training programs that can funnel your pipeline of future talent. This allows you to save time and money sourcing entry-level roles.
The Bottom Line
While the upfront investment in recruiting new employees is massive, the long-term benefits of bringing in top talent far outweigh the initial costs. Just be sure to accurately project and budget for recruiting expenses to avoid financial surprises down the road. With some careful analysis and planning, you can keep your hiring budget manageable.
Remember, your employees are your company’s most valuable asset. Recruiting the right people ultimately pays for itself many times over through increased productivity, innovation, and growth. The costs of a bad hire who damages culture and drains resources are far steeper than the price of recruitment done right. Invest wisely in your talent acquisition strategies and success will surely follow.
What is the break-even point in hiring?
According to the Small Business Administration, the break-even point is the point at which total cost and total revenue are equal, after which a business will become profitable. However, reaching the break-even point takes time.
Hiring new employees also has a break-even point. So how long should you expect to wait before a new hire starts making meaningful contributions? According to a Gallup report, new employees typically take around 12 months to reach their full performance potential within a role. After 12 months, they should have enough training and institutional knowledge to add value to an organization.
How much does it cost to hire an employee?
According to data from the Society for Human Resource Management (SHRM), the average cost per hire is nearly $4,700. However, various factors could affect the cost, including your business’s size, location and industry, as well as the specific role you must fill. Expenses can be even higher if you also include “soft costs,” like hiring managers’ time.
Hiring the best employees is not a process that should be rushed. But if you know what to look for and how to bring in the right kind of help at the right stage of the hiring process, you can streamline recruitment and retention efforts and save money.
The True Cost Of Hiring A New Employee
How much does it cost to recruit a new employee?
SHRM, the Society for Human Resource Management, estimates the average cost of recruiting a new employee at $4,700, although it can also run many times that, particularly for workers with hard-to-find skills or in tight job markets. Sometimes it can be several multiples of the employee’s salary. Recruitment is just the first step in the process.
What are the costs of hiring a new employee?
Beyond the employee’s wages, hiring includes several costs. Recruiting and hiring: All costs incurred from advertising to interviewing and screening candidates are included here. Training: The expenditure on training programs and employee support is factored into the training cost of a new hire.
What are the costs associated with hiring?
One of the more obvious costs associated with hiring is a desirable compensation plan. However, beyond salary, your costs will include the employee benefits package and the cost of benefits administration.
Why should you consider recruiting costs?
Considering recruiting costs allows you to make short-term and long-term hiring plans without having to worry about cash flow issues. This also prevents staff shortages that could occur if the recruiting budget ever ran out of money. Related: Guide to The Recruiting Process What is included in the cost of recruiting a new employee?
