If your business only hires a new employee once or twice a year, the list of costs associated with hiring, on-boarding, training and retaining good people might seem incidental. However, if you add a new associate once a month or week, or like one of my clients who is almost daily hiring in-home caregivers, then all these costly details add up quickly and you will need to have strong processes in place to identify and control them to enhance your bottom line.
1) Hidden hiring costs:
The additional expenses associated with new employees often begin well before their start date and should be recorded in a dedicated recruitment expense account, not as miscellaneous expenses. While hiring costs may appear obvious, there are less apparent administrative expenses intertwined with the process that necessitate careful monitoring. For instance, the proportion of time managers spend on recruitment should be allocated as hiring costs. Remember, you can’t manage what you don’t measure, so it’s crucial to track these expenses:
- Job specific advertising, on-line, in print or other
- Time reviewing and selecting resumes and applications
- Phone time spent screening those applicants
- Interviewing: In groups, first and second level individual interviews and perhaps a final interview by one of your executives.
- Aptitude, knowledge & skills testing including time and materials ($150-$500ea)
- Drug screening ($25-$250ea)
- Background checks ($30 – $80 ea. depending on how many jurisdictions you check)
- DMV check is a must for anyone driving on company business.
- Professional agency fees (25-30% of first year salary is common)
And these all take place before the new employee is officially hired. Many of these are unavoidable, but the goal is to minimize them when and where you can.
2) On-boarding; make a checklist and use it:
This period is dedicated to acquainting the new employee with the company’s physical and cultural environment. Employers who neglect this stage may face the risk of new hires committing significant mistakes, unintentionally isolating themselves, or becoming quickly disillusioned and potentially resigning. Questions such as the location of departments, the supervisors available for interaction, the identity of their colleagues, the company’s telephone etiquette, parking arrangements, and the schedule for breaks and meals need to be addressed.
Additionally, it’s important to document the associated costs:
- General orientation meetings
- Development and printing employee handbooks
- W-4 and other HR forms
- Pension plans or 401k’s
- Benefits handbooks
- Employee uniforms
- Security badges
- Parking permits
3) Training Costs:
You may have heard of the company CFO who came to the president complaining about the high cost of training associates. “What if we train these people and they leave”? To which the president responded, “What if we don’t train them and they stay”?
Training associates can yield an extremely high return on investment; however, it requires time and a commitment of resources to elevate an employee from a “newbie” to a fully productive team member. Until they reach this point, they can inadvertently hinder productivity and potentially damage your reputation with customers and clients. The objective is to transition them swiftly from a cost center to a point where they are fully competent and informed. To achieve this, certain fundamental general (and job-specific) types of training may be necessary. Regardless of the subject matter or format, training incurs tangible costs. Examples include:
- Safety rules and regulations (Hazmat, etc.)
- Govt. Compliance issues
- IT systems orientation
- Sexual harassment training
- Indirect costs of equipment, facilities and supplies
- Individual counseling, coaching, mentoring
- Cross training requiring added skills and knowledge
Cross-training is an excellent method of job enrichment, leading to greater employee empowerment and security, while also helping to mitigate the high costs associated with employee turnover. It can boost productivity, improve morale, and more. Additionally, it can cover gaps due to illnesses and vacations, showing employees that the company is invested in their career development. In essence, well-implemented cross-training programs are highly beneficial.
4) Retaining Costs:
“Cash money isn’t the only way workers are compensated, of course – health insurance, retirement-account contributions, education and transit subsidies and other benefits all can be part of the package. But wages and salaries are the biggest (about 70%, according to the Bureau of Labor Statistics) and most visible component of employee compensation”. Drew Desilver, Pew Research Center.
Also quoted by the USBLS:
Total Compensation costs for civilian workers increased 4.2 percent for the 12-month period ending in March 2024 and increased 4.8 percent in March 2023.
Benefit costs increased 3.7 percent over the year and increased 4.5 percent for the 12-month period ending in March 2023.
Not every business can afford to offer a complete cafeteria of benefits. However, those companies competing most effectively for talent are offering benefits like the ones listed below to attract today’s entitlement savvy candidates. Where do you stand with respect to the following:
- Major Medical Insurance
- Disability coverage
- Dental insurance
- Vision care
- Life insurance
- Tuition reimbursements
- Pension/Profit sharing plans
- 401k Plans
- Flexible spending accounts
- Employee discounts of company products or services
- Free transportation to and from work (see Google and Facebook)
- Free company cafeteria open 24/7 (again, Google, etc.)
- Child care services
According to Eric Koester of My High Tech Start-Up, “estimates range from 1.5x to 3x salary for the ‘fully baked’ cost of an employee – the cost including things like benefits, taxes, equipment, training, rent, etc.” 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. And that’s the bottom line for businesses; 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.
Before you decide to add benefits, remember they are all added on top of the more mundane, but required government basics of:
- Social security tax of 6.2% on the first $160,200 in calendar gross earnings.
- Medicare tax of 1.45% on all calendar gross earnings (no maximum earnings)
- Federal unemployment tax (FUTA) of 6.0% on the first $7,000.00 in calendar gross earnings.
- Employers State Unemployment Tax (SUTA) varies by state, but amounts paid can be applied as credit to the FUTA tax payments.
In today’s economy, where automation is eliminating well-paying jobs at an unprecedented rate, it is crucial to make hiring decisions judiciously and to minimize turnover as much as possible. I trust this article has provided some insight and direction for your hiring procedures.
revised: July 2024
Robert Skidmore, President