Remember when hiring meant reviewing some resumes, picking a person with relevant skills, and making a fair offer?
Quaint, right? Today’s labor landscape is different.
It’s not enough that your preferred candidate’s LinkedIn profile looks sharp or that their skills match the role requirements. Besides the daunting task of finding top-notch talent, you must grapple with the question, “How much does a new employee cost?”
Every business leader knows hiring a new employee is a considerable investment. But the cost of hiring them extends way past their salaries and wages.
So, before your next “Help Wanted” posting, understand the financial burden of getting someone in that seat.
The Hiring Dilemma
Today’s job market is resilient with low unemployment rates. Yet, after posting a job advert and receiving numerous applications, finding the right candidate is like searching for a needle in a haystack.
So, what challenges will you likely face in search of a new hire?
- Landing the right talent – The low unemployment rates translate to more competition for skilled talent across industries. Finding candidates with the required skills and experience might be challenging.
- Offering competitive compensation – You might have to offer higher salaries, better benefits, flexible work arrangements, and other incentives to attract top talent. These further raise hiring costs.
- Navigating a lengthy hiring process – Hiring takes time – from sourcing to screening, interviews, assessments, background checks, and negotiations.
- Retaining new hires – The abundant job options can make retaining new employees long-term difficult, leading to costly turnover.
- Integrating culture fits – Even skilled candidates may not align with your company culture and team dynamics.
Beyond the Salary – Unveiling Hidden Costs
When budgeting for a new hire, it’s tempting to just account for salary and benefits. But a host of hidden costs can ambush you. Beyond the paycheck, what exactly are you signing up for by bringing in a new team member?
The Recruitment Process Expenses
The journey begins with recruitment. Casting your net into the vast pool of talent comes with the following costs:
- Internal recruiting costs – expenses spent on recruiting when using your organization’s HR department and employees. These may include:
- Recruiters’ salaries
- Interview costs
- Employee referral bonuses
- Hiring team training costs
- External recruiting costs – expenses of hiring and recruiting through outside firms or services. These may include:
- Job boards
- Recruiting agency fees
- Advertising costs
- Recruiting software
- Background checks
The Price of Onboarding
Once you’ve found your ideal candidate, it’s time to welcome them aboard. Onboarding, though often overlooked, comes with its own set of expenses, including:
- Company swag, like welcome packages with shirts, cups, notebooks, and other branded items
- Training materials
- Mentorship programs
- Dip in productivity as the new employee gets up to speed
- Equipment costs
- HR activities
These costs can rack up real dollars, especially for mid- and high-level roles.
Taxes and Benefits
It’s no secret that employment comes with tax obligations. You must factor in payroll taxes, including the Federal Insurance Contributions Act(FICA), Federal Unemployment Tax Act (FUTA), and Social Security and Medicare contributions, when considering the cost of a new hire.
You’ll also incur several employee benefits, such as 401K contributions, retirement savings, health, disability, workers comp, and liability coverage. These taxes and benefits can add 25-40% to base pay.
When you hire a new employee, you don’t expect them or your existing staff to quit. Yet, the risk of turnover is legit.
When an employee leaves, the costs extend beyond severance pay and recruitment fees. There’s the loss of productivity, the resources spent on replacement, and its effects on team morale. EBN reports replacing the employee can cost you up to 33% of their annual salary. The turnover drain is real.
Legal and Compliance Costs
Staying on the right side of employment laws and regulations is non-negotiable. Messy terminations or discrimination lawsuits from the hiring process expose you to financial risk.
Some legal and compliance costs include:
- Hefty fines and penalties for non-compliance
- Legal fees to defend against employment law claims or to draft employment contracts and policies
- Legal audits
- Adjustments to HR practices
- Reputational damage
- Settlements to resolve employee lawsuits and claims
Prioritizing legal costs can help safeguard your organization’s reputation and integrity.
Office Space, Equipment, and Overhead
Your new employee needs a place to work and the tools to do their job effectively. These costs can be substantial and may include renting office space, providing desks, computers, software licenses, and other logistics.
If your organization has adopted remote work, you’ll also factor in remote equipment and connectivity, adding another consideration to your budget. These costs can bloat, especially if you have more than one new employee.
Loss of Productivity
A new employee can take up to 12 months to reach full productivity. They build capabilities through orientation and learning from managers and other team members. The significant time required to bring the new employee up to speed and into operations reduces productivity.
While the loss of productivity might not impact your organization in the short term, it might be among the biggest financial burdens in the long term.
Time and Effort Expenditure
They say time is money. In this case, it really is. HR personnel, managers, and existing employees spend copious time and effort hiring, training, and onboarding new team members. While this expense is intangible, it’s essential as it can come at the cost of these employees’ other tasks.
What’s the Actual New Employee Cost?
Determining the full price tag of hiring a new employee is crucial for making an informed budget and growth decisions.
While each role and company is different, some useful benchmarks from the Society for Human Resource Management suggest:
- Total first-year costs per new hire equal 3-4 times the employee’s salary.
- The new employee cost averages around $4,700 for the lower level and $29,000 for the executive level.
These figures reflect the holistic financial impact of expanding your team.
Now You Know the True Price Tag
The price tag is surprisingly high when calculating the new employee cost from recruiting through retention. Not to mention the time and effort existing employees spend onboarding new hires.
That’s where time tracking comes in – it provides data on the time and effort required for recruitment, training, and ramping up new staff. It can help you understand the full new employee cost and make smart hiring decisions. Sign up for Time Tracker’s free 14-day trial to gain visibility into the time investment in hiring new staff.