What is the cost of hiring a new employee?

cost of hiring an employee
Posted on 05 April 2024 In Recruitment

Hiring a new employee is a serious investment, one that can pay off when done well. You’re more likely to hire someone that you feel 100% confident in if you fully understand what’s at stake financially. This is one of several reasons why it’s important to understand the direct and indirect costs involved in hiring decisions. Other reasons include the ability to properly determine returns on investment, as well as showing you which aspects of the hiring process can be optimized without compromising on quality.

According to the Society for Human Resources Management (SHRM), the average cost of hiring a new employee approaches $4,700. Of course, the reality is that some posts are easier to fill than others – in some instances, the cost of a new hire can amount to three or four times their annual salary. In this article, we’ll be exploring the various direct and indirect costs associated with hiring a new employee.

What are the Main Factors Behind Recruitment Costs?

Direct Recruitment Costs

These are what usually spring to mind first, and are fairly easy to project and budget for. However, you may be surprised to know that they only represent around 30 to 40% of the total cost of hiring employees. Here are some of the main examples of direct recruitment costs:

1. Acquiring a Pool of Candidates

The more applicants you can attract, the more likely it is you’ll find someone who is the perfect fit. For this reason, one of the main direct costs of recruitment is attracting potential candidates from your talent pool by distributing advertisements on job boards, industry websites and social media. While you’ll want to be strategic in how you allocate your costs (e.g. by seeing which channels have historically provided high-quality candidates) the more you invest in this process the wider your pool of applicants will be.

2. HR Time and Resources

A thorough and meticulous hiring strategy will always reap rewards, but it is of course a time-consuming process. In fact, some companies report spending nearly 30 hours over 4 weeks recruiting a single employee – this time is usually spent crafting job descriptions, placing advertisements, reviewing applications and scheduling interviews. Fortunately, Broadbean offers several tools to expedite key parts of this process, including resume database software to reduce time spent searching for candidates, and an applicant ranking system that uses machine intelligence to help HR departments find the best match for their next role.

3. Remuneration, Benefits, and Payroll Taxes

Whether you’re creating altogether new posts or are filling vacancies, your new employees’ remuneration and benefits from part of the recruitment cost. And, of course, nothing is more certain than taxes. In the US, these include taxes to fund Social Security and Medicare. These costs have the advantage of being predictable, and you’re sure to have budgeted for them before deciding to recruit. 

4. Formal Onboarding Costs

Now that you have a new team member, it’s time to sign the contract, show them the ropes, provide on-the-job training, and equip them to get their work done. Apart from this, your admin team must set up the new employee in the HR management system and recruiters must check in to see whether onboarding is going smoothly. Forbes reports an average onboarding cost of $1,400 per employee.  

Indirect Recruitment Costs

As we mentioned before, the majority of recruitment costs are actually indirect – and if they’re not controlled for they can accumulate quite significantly. It can be somewhat difficult to calculate an industry standard for indirect recruitment costs, but here are some key examples:

1. Time Spent by Managers

While HR managers and employees smooth the path towards hiring a new employee, they’re seldom the people who make the final hiring decision. It takes a village – especially for more strategically important roles, so a single hiring decision often requires an entire panel of senior staff members. Their time could be seen as a direct cost, but there are also indirect costs as their time spent interviewing and choosing a new employee could have implications for their input in other parts of the business. Fortunately, this is usually balanced out by the increased productivity of a successful hire that’s been placed in a role where they can thrive!

2. Time Spent Onboarding and Training

It’s not just managers and HR teams that play a crucial role in onboarding and training new employees. Administrative staff are equally important in guiding new hires, and employees dedicate time from their daily responsibilities to support newcomers as they acclimatize to their roles and the work environment. While this can have an initial impact on productivity, the new hire will have a unique set of skills and an eagerness to succeed – which is sure to have a range of long-term benefits.

3. Impact On Workplace Dynamics and Team Synergy

An often overlooked cost of hiring and training a new employee is their impact on teams, which may be challenging to quantify. In addition to direct expenses, consider the indirect costs associated with the time needed for new employees to settle in, learn work systems, and the shift in team dynamics during this adjustment period. These changes must be embraced, as they can enhance long-term cohesion and ensure that teams benefit from fresh perspectives.

4. Initial Loss of Productivity

Learning curves, while valuable, can come with indirect costs. Regardless of a robust onboarding process, new employees typically take around 6 months to reach full effectiveness, with more complex roles possibly requiring up to a year. It’s not about lacking skills or inadequate training; rather, new hires may be unfamiliar with certain workplace norms. SHRM recommends ongoing onboarding support for at least 12 months post-recruitment to ensure success.

Optimizing Cost Per Hire Without Compromising Quality

Thanks to Broadbean’s suite of software solutions, recruiters are finding that they can work more quickly and efficiently, attract better candidates, and cut recruitment costs. For example: 

Comparing the Cost of Retaining Employees vs Hiring New Employees

On the surface, retaining an employee doesn’t cost you anything extra while hiring a new one means you incur added expense. However, retaining employees, while being more cost-effective than hiring new ones, requires attention and isn’t entirely free. 

  • Salaries and benefits must remain competitive: Forbes reports that holding the same job for as little as two years can equate to a lifetime earnings reduction of 50%. It’s no wonder that salary increases are one of the main reasons why people move between jobs. For this reason, regular pay reviews are one of the best ways to retain long-term staff.
  • Training and personal development also matter to employees. People often start looking elsewhere then they think they’re starting to stagnate in terms of learning and development. Helping employees to advance can be mutually beneficial – they already know the workplace and can adapt to new positions much more rapidly than new hires.
  • Creating a pleasant and productive working environment should also be a priority. By proactively investing in high-quality staff facilities such as flexible workspaces and dedicated areas for wellbeing (not to mention regularly requesting feedback from employees) leaders can significantly enhance engagement. This, in turn, not only boosts morale but also contributes to higher levels of job satisfaction and improved employee retention rates.

The bottom line? It pays to hire for retention. Choosing the right people means you have a better chance of them settling in quickly and staying longer. We’re here to help! Find out more about Broadbean’s recruiting tools today.


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