Expense Expectations of Hiring a New Employee

Business is booming and suddenly, you are in need of extra hands in the office to accomplish your many emerging tasks. It’s time to start thinking of hiring new employees.

Though this phase is very exciting and productive for your company, recruiting new staff members is also a huge assignment that is both timely and financially costly. Unless you know what to expect and how to handle the changes well, onboarding fresh personnel can cause major financial and management problems for your industry. Not only do you need to take a new salary into account, but also budget in additional expenses like costs of recruiting, training, and benefits.

However, the worry and problems can be overcome with proper planning and supervision. Here, we have all the expense expectations of hiring a new employee that you need to be aware of.

Recruiting Expenses

The efforts, both financially and hourly, can become a massive investment when it comes to simply finding the right person for your latest position. With a combination of advertisements, reviews of resumes, interviews, and other recruitment-related tasks, a company can be several hours behind their normal tasks. And as most know, time is money. Therefore, spending time by prioritizing new employees over standard responsibilities can become detrimental if those tasks get pushed to the back burner for the sake of time restrictions.

Not to mention, additional funds to run drug tests, background checks, and other outreaching advertisements can be a major financial investment for a company.

Not every establishment or every employee is going to require the entirety of the recruiting process mentioned above, but it is important to understand how much time and money many go into finding a new person. According to business advisor, William G. Bliss, an $8/hour employee can end up costing a company around $3,500 in turnover costs.

Training Expenses

As many business owners know, the next step after finding and choosing a new employee is to train them. No matter how skilled the person is, they are always going to need a basic rundown of policies, procedures, work attire, programs, and expectations. Properly training an employee is vital to the success of an industry, and, therefore, one should not skimp on this process, which also means that this element may be costly.

In fact, training is often the most costly portion of hiring because of all the needed necessities to make that new employee equipped and ready to work efficiently. Such monetary expenses, or overhead, may include, but are not limited to:

  • Work Attire
  • Employee Programs and Software
  • Training Handbooks
  • Tutorial Videos
  • Office Space
  • Additional Supplies

According to Training magazine in 2007, companies spent an average of over $1,200 annually per employee and about 32 hours in training. Though this may not be the norm for every industry, it’s important to keep in mind the potential to spend a lot of time and money in the training process. To quickly calculate your expense of training a new employee, use this formula, constructed by entrepreneur and consultant, Scott Allen:

"Calculate the cost of both structural training (including materials) and the time of managers and key coworkers to train a new employee to the point of 100% productivity."

Salary and Benefits Expenses

Obviously hiring a new employee means that their work must be rewarded with payment and/or benefits. Though not every business offers the major benefits of health insurance, dental plans, and disability coverage, most places do agree to some employee perks such as free food items, discounts, or holiday bonuses.

According to Boston Business Journal, the salary, plus benefits, usually totals “in the 1.25 to 1.4 times the base salary range.” For example, the costs of the salary and benefits of an employee with a $50,000 annual income could actually cost a company $62,500 to $70,000 in payments alone (excluding recruiting and training expenses).

However, as a respectable company, you need to treat your employees well, which is why a decent salary, along with benefits, is necessary when it comes to staff. But it is not financially possible to provide everything available, so, in order to figure out which benefits have the highest long-run payoff, check out the Job Hunting: Higher Pay vs. Better Benefits here.

The Break Even Point

Of course, the beauty of hiring the right employee is knowing that their work will ultimately benefit your franchise in the long run. However, that turnaround payoff may take a while to emerge. This is known as the break-even point. Though some may experience a return on their investment sooner than others, the average break-even point, according to the Harvard Business School, is about 6.2 months.

During the first few weeks of employment, a new staff member is 25% efficient, meaning that there is a 75% loss of productivity in the employee’s salary. Essentially, this is wasted money for a business; however, this is only due to the employee’s learning curve. The more they learn, the more efficient they become in their discipline. Eventually, the new hire will master their tasks, seamlessly blending into the workplace, and overall contribute to the company’s management instead of extracting from it.

The Bottom Line

As an employee becomes comfortable in their position, and becomes more time effective and task savvy, the rate at which their employment will benefit your company will only increase, so long as they do their job accordingly. Therefore, it’s always beneficially to invest real time and money into finding the best employees available. Even though you may spend a lot in each phase of the hiring process, the return will be worth it knowing you have a great staff under your roof that can return, or even heighten, the profit.

However, it is beneficial to know the expenses of hiring upfront so you can prepare for the time and monetary commitment ahead.

Essentially, calculating the true costs of employee enrollments comes down two four distinct components: wages, benefits and taxes, overhead, and time and effort. When added together, these elements will calculate true cost.

Knowing how all of these fundamentals factor together will give you the most advantage when it comes to the expense of hiring a new employee.

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