When running a business, it takes money to make money. You make spending decisions every day for the betterment of your company, and one of the most important decisions is people.
The cost of hiring an employee is arguably one of the most expensive parts of running a business. While that may seem scary, people are the key enabler to business growth and performance, so hiring new employees is a super-exciting process.
In this article, we’ll look at the true cost of hiring an employee. Once we’ve run through the common cost areas to think about, we’ll look at how to tie those costs together and optimize your total investment.
- 7 Most Common Hiring Cost Areas
- The Total Costs of Hiring an Employee
- How to Optimize Your Hiring Costs With Toggl Hire
7 Most Common Hiring Cost Areas
Here is a breakdown of some of the most common hiring costs across any industry. Each of these contributes to the overall cost to hire a new employee and all need to be considered in the round.
1. External Hiring Team/Recruitment Partner Costs
For many companies, having a dedicated HR team simply doesn’t make sense. Startups are booming across the world, and teams of half a dozen people can successfully run a business. If that’s you, there are two things to note:
- It’s not necessary to have a hiring expert in a team this small.
- With only several people on board, every new hire is crucial for the team’s success.
Most of all, small business owners spend around 40% of their working hours on tasks that do not generate income, so you don’t want to add to that with hiring.
Because of this, many companies enlist the help of outside recruitment support. There are numerous recruitment agencies happy to help you out in filling a position, but be aware – they don’t come cheap.
Small business owners spend around 40% of their working hours on tasks that do not generate income, such as hiring.
Most agencies work on a performance model where they are paid only when they hire the right candidate. The price for such a service? Anywhere between 15 to 25% of the employee’s annual salary, and maybe even additional bonuses for c-suite level talent.
Depending on the salary you have in mind for a new employee, this is how much you could be paying a recruitment agency:
|Employee Base Salary||15%||20%||25%|
2. Internal HR team
But, once your company gets big enough to warrant its own hiring processes, it may be time to get a dedicated HR person or team onboard. However, that too comes at a price.
At a minimum, you’ll have at least one HR manager on your team. Salaries differ across the board, but general estimates are anywhere from $91,000 to $120,000 per year.
The HR expert does everything from setting up the job ad, to putting it out on job boards (such as Jooble or Jobbatical), screening and sourcing the candidates, assessing and interviewing them, all the way to making an offer.
Of course, the HR manager and team have a lot more on their plate than just hiring, so working out their costs per hire is a bit trickier. Here’s how you can do it though:
- First, make sure you understand your HR Manager’s hourly salary. There are many tools Salary-to-hourly tools out there to help. For example – a $100,000 salary breaks down as around $385 per hour.
- From there, work out how many hours it will take for your HR Manager to hire a new employee. That includes everything from posting the job ad to completing an offer.
This isn’t a number you’ll know right away, but you’ll get an idea over time. Let’s use 20 hours as our example.
- 30 hours x $385 = $7,700 – that’s your internal HR team cost for that hire.
3. Job Boards Fees
If you’re doing your recruiting internally, you’ll need to start to consider the costs of getting your vacancy out there. Job Ads fees are one of the most common costs to think about, and vary wildly between which site you use.
For example, LinkedIn is one of the hottest places to look for a job. Up until a while ago, they had a fixed price plan of $495 for 30 days for one position. Last year, it was changed to a pay-per-click model. Currently, it will set you back $1.20 to $1.50 per click on your job ad, depending on the job title, location, and competition.
Here are some high-level costs from other popular job boards:
- Indeed – Set your budget and pay between $0.10 to $5 per click depending on the title, location, and competition.
- Monster – Monthly subscriptions from $249 per month for one job to $999 per month for five jobs.
- CareerBuilder – Monthly subscriptions per month from $219 to $599 depending on the number of roles.
- Dice – A single job posting for 30 days costs $395.
- Craigslist – $10-$75 for a 30-day posting
The key to remember with job boards is that you’re paying for exposure. Indeed, Monster & LinkedIn cost a lot because they have the highest number of daily users. We’d always recommend seeking out niche job board to optimize cost and target the right type of candidates for you.
4. Background Checks & Security Clearance
Once you’ve found someone you want to hire, it’s best practice to learn more about them before making an offer. This is why it’s useful to run background checks.
You can check for anything from verifying their education, previous employers, to criminal databases. For specific industries, such as Defence, you may also need to apply for security clearance which can cost thousands of dollars.
Security clearance aside, a standard background check can cost as little as $5 or as much as $80 depending on how detailed you want to go.
5. Onboarding and Training
What many people fail to factor in when they consider the Cost of Hiring an Employee is the money you need to spend onboarding and training them.
These costs include:
- Cost of IT equipment (Laptop, phone, software licenses)
- Cost of formal training (Courses)
- Cost of employee support (Time for other team members to support)
- Loss of productivity as new start gets up to speed
For the last point, as confirmed by research, it takes 8 to 26 weeks for an employee to achieve full productivity. During this time, organizations are often essentially losing money as the new employee costs more than they are earning for the company.
The more complex or senior the job, the longer it takes to get familiar. In other words, a new sales representative should start to pay for themselves sooner than a new senior manager.
While IT and training costs are fairly easy to quantify, only you will know how much support a new employee will need or how much their lack of productivity is costing.
6. Salary, Benefits & Bonus
Once an employee comes on board, you’ve got to start paying their wages. Depending on your structure, this will mean weekly or monthly wage salaries going forward into the future.
When calculating your ongoing cost to hire and then employee a new member of the team, make sure you consider the following cost aspects:
- Core salary
- Taxes (e.g. Social Security/National Insurance)
- Benefits (e.g. Pension)
- Bonuses (Both yearly performance and any signing bonus)
Let’s consider the United States, and a famous research study conducted by MIT. In an example where the basic salary of an employee was $50,000 per year, the employer’s costs are anywhere from 1.25 to 1.4 times higher than the base. In this specific case, for an employee to receive $50,000, the employer has to pay from $62,500 to $70,000 per year.
Long term, remember that most employees expect their salaries to rise over time, usually in line with your countries inflation.
7. Other Acquisition Channels
While most new employees come through job boards or external recruitment agencies, there are other ways to source new candidates for roles.
When calculating the cost of hiring an employee, remember to change your estimates based on your acquisition channel. Other common examples include:
- Attending/hosting career/industry events
- Your website’s career page
Each of these schemes may have an associated cost, which is especially easy to estimate for events or referrals. Fixed costs such as a website careers page should be factored across all of your hire. E.g if it costs $1000 a year to host your website page, and you plan to make 10 hires, that’s $100 per hire.
The Total Cost of Hiring an Employee
So with most of our common cost areas identified, it’s simply the case of adding all the ones which are relevant together to get a total cost.
Let’s run through an example, calculating the one-off costs of hiring an employee using an internal HR Manager:
- HR Manager 30 hours effort – $7,700
- 1-month job ad on Monster – $249
- Basic background check – $50
- IT equipment – $600
- Training courses – $400
- Employee support 20 hours effort – $6,000
- New employee signing bonus – $2,000
Total – $16, 999
This is just an example, albeit a very expensive one! But, it gives you a good flavor of the cost of hiring an employee in 2022.
There are many studies out there that have also looked into the cost of hiring an employee. Here are some high-level results:
- As stated in a study by the National Association of Colleges and Employers, hiring an employee in a company with 0-500 people costs an average of $7,645.
- Another study by the Society for Human Resource Management states that the average cost to hire an employee is $4,129, with around 42 days to fill a position.
- According to Glassdoor, the average company in the United States spends about $4,000 to hire a new employee, taking up to 52 days to fill a position.
How to Optimize Your Hiring Costs with Toggl Hire
What if we told you that you could optimize the cost of hiring an employee?
This is exactly what we’ve been doing for Toggl, our sister company. We helped Toggl hire 68 people, with more than 1,500 applicants per position.
Through effective skills testing – we were able to save 22 hours per candidate, on sourcing, screening and shortlisting.
We worked out these 22 work hours were the equivalent of $78,000 of resource spend!
Toggl Hire solves one of the biggest problems in hiring – screening. Don’t wats precious time screening hundreds of candidate resumes. Instead, use skills testing to put your candidates to the test and automatically filter the top performers to take forward.
If you’d like to optimize your hiring process and save time and money, give Toggl Hire a try. We guarantee to help you reduce the cost of hiring an employee by automating the sourcing and providing you with top-tier talent!
James Elliott is a Strategy Manager and Writer from London, UK. When not working on the day job, James writes on a variety of business and project management topics with a focus on content that enables readers to take action and improve their ways of working. You can check out James’ work on his website or by connecting on LinkedIn.