Do you know how much it costs you to fill a vacant role?
Use the steps below to help you calculate the hiring costs for your business.
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Identify your direct costs
The direct costs of replacing a departing employee include:
- Expenses of advertising the vacancy
- Fees paid to recruitment agencies
- Fees paid to consultants for conducting tests, checking references, pre-employment medicals, etc
- Termination payout amounts, including pro rata long service leave and pay in lieu of notice
Add your indirect costs
The indirect costs are often less obvious and contribute a substantial proportion of the overall expense. Indirect costs include:
1. Loss of productivity for other employees filling in for vacant position
Where other employees perform part of the vacant job as well as their own jobs, estimate one-third of each employee’s total daily remuneration, multiplied by the number of days they continue to fill in.
2. In-house costs of hiring
This includes the hourly rate of each employee involved in the process, multiplied by the number of hours they spend on tasks such as:
- Drafting position descriptions and advertisements
- Liaising with advertisement placement and recruitment agencies
- Fielding enquiries from prospective candidates
- Reading resumes
- Screening applications and advising candidates
- Making appointments for interviews
- Carrying out interviews and debriefing
- Verifying qualifications, checking references, conducting pre-employment assessments, etc
3. Induction and training
Multiply the hourly rate for each employee involved, by the time spent on training and induction of the new recruit. Also include the cost of training and induction facilities.
4. Termination administration
Again, it is possible to calculate the cost based on the hourly rate of the relevant staff members. This may include:
- Pay officer time to process termination pay,
- Exit interviewer time,
- Employee and line manager time to finish paperwork, return and check employer’s property (such as security tags, vehicles, tools, uniforms, sales resources, etc) and
- Administration time, for example, on cancelling computer access.
5. Loss of productivity in early stages of employment
New employees normally take some time before they become sufficiently familiar with their jobs to achieve 100% productivity. One suggestion is to use an estimate of 50% productivity until the required standard is reached.
Estimate the number of days required to reach 100% productivity and multiply this by 50% of the employee’s daily total remuneration rate. Some estimates will be quantifiable, such as changes in sales income, but many will not.
6. Loss of productivity in final stages of employment
The productivity of many employees falls while they are serving out their notice period. For example, many are preoccupied with making new arrangements relating to a new job. Others may want to take unused sick leave or other days off they feel are owed to them.
There will also be time used for exit interviews, client hand over and farewell parties. You might attempt to estimate percentage loss of productivity based on your observations of past employees who resigned, and multiply the percentage by the employee’s daily total remuneration rate and number of days after resignation. Again, some estimates will be quantifiable but many will not.
Summary of employee turnover costs
When all the quantifiable expenses are calculated, the total cost of turnover for one employee is as follows:
Total direct costs
+ Loss of productivity for other employees filling in for vacant position
+ In-house hiring costs
+ Termination administrative costs
+ Induction and training costs
+ Loss of productivity in early stages of employment
+ Loss of productivity in final stages of employment
LESS Unpaid remuneration while the job is vacant.
Would you like to reduce your hiring costs?
In association with Peter Dawson of The Dawson Partnership, we have prepared an e-book to help you hire efficiently and effectively. Click here for your copy of Successful Recruitment: Transforming your business through best practice.