Blogs

The cost of hiring a new employee: we do the sums

Have you ever stopped to calculate the cost of hiring a new employee?

Probably not, which is why we've done the sums for you.

We’re betting the answer will come as a surprise. It certainly surprised us.

The cost of hiring a new employee exceeds, on average, £30,000.

You’ve been involved in recruiting new staff for your business, so you know where the obvious costs lie: advertising the job, using a recruitment agency, paying the wages of temporary staff, interviewing candidates, and carrying out induction for the new employee.

So far so good. But it might surprise you to learn that the cost of these activities is only a small proportion of the total cost of replacing an employee, particularly if it’s a relatively well-paid job.

Most of the cost comes from loss of productivity. And that can be substantial.

That’s why the cost of hiring a new employee is so eye-wateringly high.

Here’s the research

A recent study by Oxford Economics looked at the true cost of replacing employees earning £25,000 or more a year. The researchers looked at five different sectors: IT/Tech, Accounting, Legal, Media/Advertising and Retail.

The cost of replacing an employee varied significantly across the different sectors.

Logistic costs (advertising, recruitment agencies, wages for temporary staff, interviews and induction for the new worker) were on average £5,433, ranging from £3,847 in the retail sector to £6,630 in the legal sector.

Lost productivity, the major contributing factor

However, the cost of lost output while the new worker got up to the standard expected of an experienced worker (or ‘optimal productivity’) was estimated to be on average £25,181, ranging from £16,240 in retail to £35,307 in the legal sector.

This is how it works:

New employees will take some time to learn the ropes before achieving optimal productivity. During this time, they won’t generate sufficient output to cover their own wages.

Once they have reached optimal productivity, they’ll be generating sufficient output to cover their own salary, plus additional revenue to service the capital invested in the company.

Until your new staff member reaches optimal productivity, your company is losing money.

Getting up to speed takes time

The time taken to achieve optimal productivity varies according to sector (shortest for Media, longest for Legal).

It also varies depending on whether the new employee comes from the same sector (15 weeks), from outside the industry (32 weeks), is a fresh university graduate (40 weeks), or has been unemployed (one year). That’s not surprising.

However, what interests us is that new workers reach optimum productivity more quickly in smaller firms compared to large ones.

What does this mean for companies?

This research reveals that staff turnover is expensive, much more expensive than you might have realised.

The findings highlight the importance of hiring the right staff, and of concentrating your efforts on keeping the people you do hire.

Don’t forget that traditional methods of hiring based on job interviews are notoriously unreliable.

The cost of hiring a new employee doesn't have to be astronomical

It’s not all bad news. The researchers found that SMEs provide a great environment for the right people to flourish, and to become profitable members of staff in double-quick time.

Another upside is how the study underlines the value of research for businesses like yours.

Even better, we have a statistic you'll love: TFP can slash the cost of that scary £30,000 by up to 90%. 

Our clients are our living, breathing, profit-making proof.

Why not find out how you can join them?