You’ve found the perfect candidate and are about to make them an offer. But have you considered the potential hiring costs lurking beneath the surface? The actual average cost of hiring a new employee can be a lot more than just the salary, training, or benefits. In this guide, we delve into the often-overlooked expenses of bringing new talent on board and recruitment strategies to control your cost per hire.
What are the costs of hiring an employee in 2024?
Hiring an employee in 2024 involves a multitude of costs that go beyond just the salary. It comprises several expenses, varying as per the industry, location, and role. Understanding these categories helps organisations plan budgets effectively.
1. Direct hiring costs
• Recruitment and advertising costs
Posting ads on platforms such as LinkedIn or local job boards incurs fees. Companies may also invest in recruitment marketing strategies, which can include employer branding initiatives, sponsored content, and premium listings, thus adding to the final costs.
• Third-party recruiting fees
Many businesses choose to outsource their hiring to recruitment agencies or headhunters. These third-party services charge a percentage of the employee’s salary, which can typically range between 15% to 30%, depending on the role’s seniority.
• Onboarding and training costs
Once you hire a candidate, onboarding and training represent significant costs. This includes orientation programs, technology setups (laptops, software licences), and formal training, which ensure employees adapt quickly and contribute effectively.
• Relocation and visa costs
In a global workforce, hiring talent across borders is common. However, relocation packages and visa sponsorships add substantial expenses. This is particularly relevant for global industries like technology or finance that seek highly skilled talent.
2. Indirect hiring costs
• Lost productivity during a vacancy
While the role remains unfilled, businesses face the challenge of losing productive hours, as existing employees may take on extra tasks, and projects may be delayed. This hidden cost can have a significant impact, particularly in critical roles.
• Administrative costs
Operational set-ups associated with payroll, benefits, and other HR systems for the new employee require significant investment from the businesses. This can quickly add up to reflect significant percentages in cost per hire.
• Employee turnover
Hiring the wrong person can be expensive. If a new hire leaves within a short period, the company may incur additional costs in restarting the recruitment process. Employee churn has direct financial implications, including rehiring and retraining.
3. Employee benefits
This is a crucial component of the overall compensation package and is often mandatory or expected by job seekers. This means covering benefits like health insurance, retirement, provident fund contributions, paid time off (PTO), and other perks.
4. Technology and tools
Companies increasingly rely on digital technology to streamline hiring processes. Tools like Applicant Tracking Systems (ATS), AI-powered candidate screening, and remote interview platforms help reduce costs by improving efficiency. However, there is still an investment required to implement and maintain these systems.
5. Salaries and compensation
Remuneration or stipend is the most visible part of the hiring cost. However, salary expectations are influenced by market demand, skill shortages, and regional differences. In 2024, salaries are likely to continue rising in competitive industries like tech, healthcare, and finance.
6. Legal and compliance costs
In regions with stringent labour laws, hiring an employee involves additional costs such as legal compliance, adhering to local employment laws, and ensuring proper contracts and tax obligations are met. This is especially relevant for international hires, where compliance with different jurisdictions adds to the cost.
7. Regional variations
Cost per hire also differs based on geographical location. North America and Europe typically see higher salary expectations, benefits costs, and recruitment fees. In contrast, hiring in emerging markets like India, Vietnam, or the Philippines might offer cost advantages due to lower wages, though other logistical and compliance costs may arise.
8. Associated soft costs
These costs include the time heads of departments, leaders, and managers invest in supporting the specific roles when hiring. When added to other hard costs, the cost per hire for a company skyrockets.
The benefits of understanding hiring costs
Understanding the cost of hiring, recruiters can make long-term strategic hiring decisions.
• Improved budgeting: Accurately estimating hiring costs enables companies to allocate resources effectively and avoid budget overruns.
• Data-driven decision-making: Having a clear understanding of hiring costs allows for better recruitment strategies, compensation packages, and talent acquisition channels.
• Enhanced ROI: By minimising unnecessary expenses, businesses can increase the return on investment (ROI) of their hiring efforts.
• Improved talent acquisition: By focusing on cost-effective hiring, companies can attract and retain top talent, improving business performance.
• Optimised hiring strategies: By identifying areas where costs can be reduced, businesses can implement resource-efficient hiring practices.
For instance, if the costs of hiring are particularly high, HR managers might explore alternative solutions such as internal promotions, temporary staffing, or investing in employee development programs to fill in the skill gaps. This approach not only saves resources but also boosts employee retention by demonstrating a commitment to internal growth and development.
How to calculate the cost of hiring an employee
Did you know the average cost per hire was nearly $4,700, as reported in a 2022 benchmarking report by the Society for Human Resource Management (SHRM)? Here’s how you can evaluate your hiring cost:
1. Identify all direct and indirect costs: List all relevant expenses associated with the hiring process.
2. Estimate the cost of each line item: Determine an estimated value of each expense based on historical data, market rates, or vendor quotes.
3. Calculate the total cost: Add up all line item costs to determine the total cost of hiring an employee.
Note: When calculating cost per hire, also account for the time it takes for hiring and training, including time taken to create a job description, number of candidates screened/interviewed, onboarding journey, and hours dedicated — as this represents a productivity cost.
By regularly reviewing and updating this calculation, organisations can better understand the economic implications and make more informed decisions about their recruitment strategies.
Challenges and strategies to manage recruitment costs
While hiring costs are a significant expense for businesses, recruiters and HR professionals can adopt strategies to mitigate these expenses without compromising the quality of their hires.
Top 5 challenges in recruitment costs
• Rising talent costs: The increasing demand for skilled talent can increase salary and benefit packages, leading to higher recruitment costs.
• Time-consuming processes: The hiring procedure can be lengthy and resource-intensive, impacting productivity and increasing costs.
• Candidate quality: Finding qualified candidates who meet the specific requirements of a role can be challenging, leading to extended search times and increased costs.
• Economic uncertainty: Fluctuations in business can affect hiring decisions, making it difficult to predict future recruitment needs and costs.
• Compliance challenges: Adhering to labour laws and regulations can be complex and costly, especially for businesses operating in multiple jurisdictions.
8 strategies to manage and minimise hiring costs
1. Optimise job descriptions: Clearly define role requirements and responsibilities to attract qualified candidates and reduce the time spent screening unqualified applicants.
2. Monitor hiring metrics: Track key metrics such as time-to-hire, cost-per-hire, and candidate quality to measure the effectiveness of your recruitment strategies and optimise accordingly.
3. Leverage technology: Use applicant tracking systems (ATS), video interviewing, and online assessments to streamline recruitment and reduce costs.
4. Employee referral programs: Encourage current employees to refer qualified candidates, which can be a cost-efficient way to fill positions.
5. Internal mobility: Promote internal promotions and transfers to fill vacancies, reducing external recruitment costs and fostering employee development.
6. Negotiate with vendors: Work with recruitment agencies, background check providers, and other vendors to negotiate favourable terms and reduce costs.
7. Focus on employer branding: Build a strong business brand to attract top talent and reduce the need for costly recruitment efforts.
8. Revise your hiring process: Identify areas for improvement in your hiring procedure, evaluate where costs can be cut, and implement more efficient practices.
From recruitment expenses and training to benefits and the risks of turnover, organisations must consider various factors when budgeting for new hires. By adopting strategic approaches to hiring, businesses can reduce cost per hire while securing the best talent for their company in 2024 and beyond.
