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Businesses often hesitate to hire new workers, even when they need them, due to the time, effort, and expense involved. They know that the cost of taking on a new employee is more than just the person’s salary and benefits, which can be substantial on their own. But once you factor in the expense of recruiting, training, and more, the dollars really start adding up. Here’s a look at the various costs a business can expect to incur in hiring a new employee.
Key Takeaways
- The cost of hiring an employee goes far beyond just their salary and benefits. It also includes the expense of recruiting, training, and more.
- Companies spent an estimated $98 billion on training alone in 2023-2024.
- It can take up to six months or more for a company to break even on its investment in a new hire, as they gradually get up to speed in the job.
The Cost of Recruiting
Simply finding the right person to hire can come at a hefty price in both money and staff time.
That can include the financial costs of advertising the job opening, plus the time costs of an internal recruiter, the managers conducting the interviews, and anyone involved in drug screens, background checks, and pre-employment assessment tests for new hires, notes business consultant Bill Bliss, president of Bliss & Associates Inc. Hiring an outside recruiter, as is often necessary, will add to the tab.
SHRM, the Society for Human Resource Management, estimates the average cost of recruiting a new employee at $4,700, although it can also run many times that, particularly for workers with hard-to-find skills or in tight job markets. Sometimes it can be several multiples of the employee’s salary.
The Cost of Training
Recruitment is just the first step in the process. Once the right person is on board, businesses need to provide adequate training so the new employee can get up to speed and start producing for the company. While essential, training is also costly.
According to the most recent study by Training magazine, companies spent $98 billion on training new and current employees in 2023-2024. That figure includes training budgets, technology spending, and staff salaries.
Training costs can vary widely depending on the size and type of business. On average, companies spent $774 per trainee in 2023, the magazine said. Small companies spent the most, at $1,047, while midsize companies spent $739 and large ones, $398.
The Cost of Salary and Benefits
The most obvious cost of taking on a new employee—their salary—comes with its own bundle of side items. Benefits range from the minor, such as free coffee in the employee break room, to the major, such as paid life insurance, disability coverage, medical and dental plans, tuition reimbursement…the list goes on.
The Bureau of Labor Statistics says that benefits are about 30% of a person’s salary in the private industry and about 40% for state and local government.
Reaching the Break-Even Point
The goal of all this investment is increased productivity. But it can take time for companies to see a return on their investment. A survey of 210 CEOs by Harvard Business School estimated that typical mid-level managers require six months to reach their breakeven point (BEP). In other words, the manager has to be on the job for more than six months for the company to start recouping its investment in them.
Bliss breaks down the productivity scale into these periods:
- Roughly the first month: After training is completed, new employees are functioning at about 25% productivity, which means that the cost of lost productivity is 75% of the employee’s salary.
- Weeks 5 through 8: The level goes up to 50% productivity, with a corresponding cost of 50% of the employee’s salary.
- Weeks 9 through 12: In this timeframe, the employee usually reaches a productivity rate of up to 75%, with the cost being 25% of the employee’s salary.
- Following the 12-week mark: Companies can expect a new hire to reach full productivity.
How Much Does It Cost to Hire a New Employee?
Hiring a new employee costs more than just their salary. Benefits and other compensation, such as employer retirement contributions, need to be considered, as well as the considerable time investment employers make when they hire someone.
How Do You Calculate the Cost of an Employee?
An employee can cost a lot more than just their salary. An employer needs to consider not only the employee’s base salary and benefits, but also the payroll taxes it has to pay, any equipment that the employee needs to perform the job, any training the employee needs, and the loss of productivity while the employee is still learning to do the job. The reality is that even the most skilled workers need time to adjust to new processes and bosses, and this is done on the company’s time (and dime).
Should You Pay Employees in Stock Options?
Paying employees stock options is something many companies do in order to entice and retain top talent. A high base salary is the first consideration for many employees, but stock options can be an added inducement. When tied to the employee’s performance, stock options may also help increase their productivity.
The Bottom Line
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, so 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.
