What Does It Cost to Hire an Employee?

How much does it cost to hire an employee?

According to data from the Society for Human Resource Management (SHRM), the average cost per hire is nearly $4,700. However, various factors could affect the cost, including your business’s size, location and industry, as well as the specific role you must fill. Expenses can be even higher if you also include “soft costs,” like hiring managers’ time. 

Hiring the best employees is not a process that should be rushed. But if you know what to look for and how to bring in the right kind of help at the right stage of the hiring process, you can streamline recruitment and retention efforts and save money. 

Typical costs of hiring employees

Here is a short list of factors that can affect the costs of recruiting, hiring and onboarding a new employee:

• HR team
• External recruiters
• Job posting
• Candidate screening
• Background checks
• Compensation
• Training
• Corporate equipment and credentials
• Referrals

HR team

A human resources team is a crucial asset for recruitment. A qualified HR specialist can handle a wide variety of responsibilities, including drafting corporate policies, setting a salary range, writing a job description and training staff. 

Although hiring a dedicated HR representative can help attract and retain top talent, it comes at a cost. The average salary of an HR manager is $145,750 per year, and that doesn’t include the costs of benefits and onboarding. 

External recruiters

Some businesses use external recruiters to facilitate hiring. An external recruiter or recruiting agency often has a talent pool of qualified and experienced candidates to draw upon. And if that talent pool doesn’t quite have what you’re looking for, recruiters have various tools and resources to help you find the right employees. 

However, recruiting agencies have multiple pricing structures, which can quickly add up, regardless of the position you must fill. Whether the agency charges a percentage of a role’s annual salary, a retainer or a flat rate, the cost of an external recruiter can add significantly to the overall cost of finding and onboarding a new team member.

Job posting

Writing a compelling job description is no small task. However, well-crafted job descriptions can be the difference between attracting a top-tier candidate and a less-qualified job seeker. Producing a job description that captivates the right candidate takes time, skill and experience.

After creating a compelling job description, you must post it on multiple job boards. Free posting options or trials on platforms such as LinkedIn and ZipRecruiter exist. However, free and trial versions of these resources offer only a small selection of features. Usually, you will need a paid service for the most robust job posting capabilities. For example, ZipRecruiter provides different subscription hiring plans starting at $299 per month, while LinkedIn offers a pay-per-click model to give you more control over your budget. 

Candidate screening

Once you’ve received a promising selection of applications, you must screen your candidates. Sorting through resumes to find a potential employee can take time. Once you’ve found qualified applicants with the right experience and results, you can schedule initial screening calls to ensure potential new hires have all of the necessary hard and soft skills for the position. 

Background checks

After finding the right candidate, you may need to do a background check, which verifies basic information, like education and work experience. More importantly, it checks for past identities or any relevant criminal history to ensure your new hire is who they say they are. 

Compensation

One of the more obvious costs associated with hiring is a desirable compensation plan. However, beyond salary, your costs will include the employee benefits package and the cost of benefits administration. Benefits such as health insurance, retirement plans and employee growth initiatives will affect your budget, but the total amount will depend on the level of perks you provide.

Training

According to a Training industry report, companies spend an average of 57 hours and $954 to train each employee. But training expenditures are well worth the cost; effective new-hire training gets new team members up to speed quickly and prepares them to make key contributions to your business. 

Corporate equipment and credentials

Every employee needs essential equipment to succeed, including desks, computers and telephones. This equipment is an added expense of the onboarding process. Your IT managers also must install corporate software or create employee accounts to ensure compliance with security policies. 

Referrals

Creating an effective employee referral program isn’t easy, but the high-quality candidates it generates make it an excellent recruiting tool for many organizations. In fact, according to a study by the employee referral service ERIN, a referral is four times more likely than other candidates to be hired. 

By relying on your employee network, you can create a robust recruiting tool for finding top-tier candidates. However, you’ll incur expenses commensurate with the incentives you offer and the program’s development costs. 

What is the break-even point in hiring?

According to the Small Business Administration, the break-even point is the point at which total cost and total revenue are equal, after which a business will become profitable. However, reaching the break-even point takes time.

Hiring new employees also has a break-even point. So how long should you expect to wait before a new hire starts making meaningful contributions? According to a Gallup report, new employees typically take around 12 months to reach their full performance potential within a role. After 12 months, they should have enough training and institutional knowledge to add value to an organization. 

How to reduce hiring costs

You can keep hiring costs down and recoup your money sooner by following these tips:

• Create an internal referral program.
• Outsource your hiring.
• Build an effective careers portal.
• Recruit over social media.
• Curate a talent pool.
• Conduct interviews online.
• Improve employee retention.

Create an internal referral program.

Starting a referral program within a business isn’t easy, but it’s well worth the effort. In a referral program, your trusted workforce recommends people they trust, helping you find reliable resources faster than you would with a regular job board. 

And because internal referrals can help you find the right candidates in a fraction of the time, the associated cost is much lower. Instead of paying $300 monthly for however long it takes to find qualified applicants, organizations can incentivize their workforce with bonuses ranging from $50 for junior roles to $7,000 for specialized, in-demand positions.

Outsource your hiring.

Depending on how many roles you’re hiring for, consider using a professional employer organization (PEO). PEOs are especially helpful when you’re struggling to scale your workforce as your business grows. The best PEO services are equipped with specialized headhunters, HR managers and dedicated HR software to help track candidates, manage interviews and onboard new hires. 

Build an effective careers portal.

Even with a successful referral program and professional help, it never hurts to get back to basics. A careers portal hosted on your corporate site gives you a home base to post your open positions and showcase your company culture and values to potential team members.

Additionally, some job boards require you to link to your corporate portal during the application process, so posting a compelling job description on your official site is always a good step, regardless of your other recruiting efforts.

Recruit over social media.

Sometimes, it can be effective to cut out intermediaries in recruiting. With a healthy social media presence, you can promote open positions without a job board or hiring service. However, results aren’t guaranteed. Because social media isn’t equipped with all the recruiting and hiring tools you’d find with a PEO, it doesn’t have the same vetting services to assess job applicants. 

However, those responding to your corporate recruiting posts on social media are already engaged with your company’s activity, which could lead to a passionate new employee who’s familiar with your company’ values.

Curate a talent pool.

Often, several capable and exciting prospects emerge. However, you can’t hire all of them. In these cases, recruiters typically set aside candidates for future opportunities. 

With a talent pool of past interviewees who made a positive impression but didn’t make the final cut, you can start a future hiring process with a roster of qualified prescreened candidates. This could potentially give you a head start on identifying the right person for the job and thus shorten future hiring processes.

Conduct interviews online.

Virtual interviews are now commonplace, allowing schedule flexibility for interviewers and candidates. Online interviews reduce the time and money associated with traveling and allow organizations to interview people from a wider geographic area. According to SHRM, virtual interviews can also speed up recruiting and hiring. 

Improve employee retention.

The most impactful thing any organization can do to keep hiring costs down is to prevent turnover by improving employee retention. According to the Work Institute’s 2023 Retention Report, replacing an employee can cost as much as 33 percent of their salary. Employees who leave within the first year are the most costly because companies can’t recoup hiring costs with such limited productivity and output.

However, employee turnover costs go beyond the financial aspect. When employees leave after many years, they take with them the wealth of knowledge they’ve accrued over their tenure, which could be a substantial detriment to the company.  

A toxic work environment, questionable management, exploitative business practices and low compensation could all lead to the departure of a valued team member. To keep your employees satisfied and ensure their continued contributions, you need trained professionals who are well versed in HR-compliant business policies and practices. Building a sustainable work environment and supportive policies requires cooperation between your business’s leadership and HR department.

Hiring the right employees saves you money

Ultimately, recruiting and finding the right employee for your open position will help you reduce hiring costs over time. If the employee you hire has the right skill set for the job and is happy in the position, you’ll reduce expensive employee turnover and productivity losses later. Spending the time and money upfront to follow hiring best practices is well worth the investment.

Erin Donaghue contributed to this article.