The formula for calculating hiring costs will, to a large extent, be unique to each company’s circumstances and be dependent on their acquisition strategies, application process, assessment methodologies, interviewing protocols, reference checking, quality of hire and retention rates. If we look at some key variables you might like to put a cost against each and come up with your own personal formula. (Update 15/12/12 – Following a comment below, I have now created a worked-example which you are welcome to download and modify to suit your circumstances – Download Calculator)
- Advertising – preparation time, job boards, print media, networks?
- Do you use recruitment agencies?
- Employee referrals – do you pay a bonus?
- Passive candidate search – how much time spent? Any fees for access to databases?
- Previous applicants – do you have a searchable database?
- Employer branding – Do you maintain careers portals on website, LinkedIn and social media?
- Do you have a regular careers day?
- Do you have a social media strategy and budget?
- Do you have a graduates’ program?
- Do you have sign-on bonuses?
- What are the costs of any other benefits you offer?
- Do you accept email? – this is the most difficult to manage and very costly in time
- Do you have an ATS (Applicant Tracking System)? – online applications and tracking saves a lot of time
- Do you have an AMAS (Applicant Management and Assessment System)? – much faster and better than ATS
- Do you notify all applicants of the outcome? – this is an important investment in your employer brand and is easy to do with an ATS or AMAS
- Reading resumes – In a recent survey, 20% of job-seekers admitted their resumes contained lies, 27% exaggeration and 21% said they loaded keywords to trick automated resume scanning. Resumes tend to be a poor indicator of on-the-job performance and can lead to wasting time on interviews or overlooking the better candidates.
- Screening questions are so much better (as long as the answers don’t become mini-resumes). Can help to quickly identify those with the right skills, experience, qualifications and knowledge.
- Attitude assessment – if you use a tool specifically designed for recruitment you can improve selection and optimise quality. A very worthwhile investment.
- Benchmarking – do you have a way to compare applicants to your best performers in the role?
- Practical tests – e.g. welding, data entry, electrical fault-finding etc. Each has a cost but can be invaluable.
- Probation period – the final assessment – any failures at this stage are a huge cost to the organisation – no one is perfect and you might like to factor in a failure rate.
- Do you telephone interview?
- Do you video interview?
- Do you interview one-on-one or in-panel?
- Do you second interview?
- Do other managers interview?
- Do short-listed applicants have a site visit?
- Do you bother?
- Do you settle for one positive contact?
- Do you insist on two?
- Do you persist for three?
- Do you use background checking agencies?
- Do you check validity of qualifications with the issuing institution?
- Do you need police checks?
- Do you need drug & alcohol screening?
- Do you need medical checks?
Quality of hire and retention rates:
- Time to hire – some vacancies are well planned and you have ample time to resource. However, many times the position has to be filled immediately and every day lost is a direct cost to the company.
- Do you have to pay relocation costs?
- Time to induct – every new recruit will take some time to come up to full productivity and will hamper other employees until they do. This is a major cost and it is inversely proportional to the investment made in the preceding steps. It is a good metric to monitor if you are not doing so already.
- Probation completions – some people monitor how many recruits fail to complete their probation as a ‘quality’ measure. Earlier I did suggest factoring in a failure rate for cost purposes but I do not advocate this as a metric. I much prefer the positive metric of ‘full productivity’ or ‘time to induct’.
- Cost of a bad hire – various research papers put the cost of a bad hire anywhere from one to five times the annual salary for the position depending on the significance of the role within the company.
- Retention rates – this is a high cost for any company. Staff turnover not only triggers the entire recruitment cycle again, it also means a loss of expertise and knowledge and may harm morale.
Formula for Hiring Costs Comments and Feedback
I doubt if this is an exhaustive list and others might like to suggest further line items. Please feel free to comment.