Ep. 10: The True Cost of Hiring Employees (and How Not to Burn Money)

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Ep. 10: The True Cost of Hiring Employees (and How Not to Burn Money)

Hiring new employees costs businesses money, from the downtime of having a vacancy, to the people who are involved with spending their time trying to fill the position by screening and hiring a new candidate.

Hiring employees who don’t work out can cost up to 10% of that employee’s annual salary, so it’s crucial that when you hire someone, you go through all the necessary steps to ensure it’s done right the first time.

Transcript

David:

Welcome, guys, to another episode of the Hired Talent podcast, my name is David, I’m one the team here at the Hired Talent, and I’m Fletcher as always. Fletcher, welcome.

Fletcher:

Good afternoon.

David:

So Fletcher, today we are talking about various costs around hiring. So they come in a few forms, so I hear, and would love to pick your brain a little bit on how that all pans out for other business owners like yourself.

David:

Where do the costs of hiring come from? I know from my own personal experience, I imagine you have to advertise for a job, maybe you have to spend some of your time interviewing people and that costs some money, but kind of just walk us through in your own perspective, what are some of the key areas that other business owners and HR folks can keep an eye out for costs around hiring.

Fletcher:

Yeah, this has been kind of one of the hot topics around the office here lately. I’ve spent a lot of time chatting about it, and I think it came up for me quite a while ago. You start to read all these articles and as entrepreneurs, as hiring managers, as HR people, we’re inundated with these stats. Five to ten times the annual salary of an employee, right?

Fletcher:

Where do these numbers come from? How are people coming up with 50,000 dollar a year person, costs of hiring, or the mistake in a miss-hire there is costing you 250,000 dollars. Where does that come from, right?

Fletcher:

This one, two, three, ten times annual earning of the employee, right? So I spent a lot of time thinking about that in the last six years, and we created a really nifty tool, kind of like a calculator, right? Where you can actually plug in some of these costs, and we really just got nitty gritty into trying to itemize those.

Fletcher:

And I think it kind of breaks down into a handful of buckets. So there’s your really direct hard costs, then some more direct, but softer costs. There’s huge opportunity costs, and then there’s under that bucket, which often falls under lost productivity, also an opportunity cost of not filling the position, which is significantly higher than I think most people think.

Fletcher:

There’s emotional costs, both to the management, the employee, and to everybody else around them which I’ll call one of those unintended consequences, which those ones can be really costly, potentially, right?

David:

Yeah, so I mean I can make some educated guesses at some of those costs, but I guess I’m curious, if you can kind of walk through each of those buckets and just give, what are a couple examples of, what is a hard cost, what’s a soft cost, opportunity cost? What do these kind of look like in the day to day?

Fletcher:

Well, let’s start with hard costs ’cause I think that’s one cost that I think we can all sort of get our head around. It’s a little more logical, it’s more direct, right? It’s gonna be pretty simple. What was your cost of advertising the position? How many hours did you and your team have to put into managing that process, including managing the interviewing process, and managing also the onboarding process.

Fletcher:

So there’s direct costs with those hours that are spent there, so you can figure that out pretty reasonably, or make a good estimate of how much time was spent, and the average cost per hour there. Definitely know how much you spent on advertising. Most job boards these days, you’re spending at least 350 upwards to a thousand dollars in marketing costs, alone.

David:

Yeah, wow.

Fletcher:

Right? Per job per month that that job is posted. So if it takes two or three months, you could be upwards of 3,000 dollars in just direct marketing expense.

David:

Yup.

Fletcher:

If you bring in a recruiter, well we all know how much that’s gonna cost probably. I mean, that’s 20 to 30 percent of the first [share 00:04:13] annual salary, so that’s bam. Done. Direct cost, hard cost right there.

David:

Right.

Fletcher:

But for now, we’ll assume that you’re not. That you’re doing it yourself, like most of our clients are doing.

Fletcher:

Other hard costs, equipment. Training. Especially if it’s like direct training where you’re having to send that person out to a manufacturer, to in house training.

Fletcher:

Uniforms, work stations, just general supplies that are needed to actually get the person started.

David:

Yeah, there’s a lot. I think you take a lot of those sorts of hard pieces for granted as if they just appear and they’re just part of the gig, but that’s real money that you’re spending, that the business owner’s spending that you gotta factor in and if you’re gonna hire somebody and buy a new computer for them or set up a new [inaudible 00:05:17]

David:

I mean all of this stuff comes in and adds up pretty quick, I would imagine.

Fletcher:

Yeah, I think I did it once for us and I think just those direct hard costs, gotta buy a computer, I gotta buy a headset, a telephone, I gotta get subscriptions to all our different software tools that we use throughout our business.

Fletcher:

I think we came up with about 2,500 dollars, so basically all of the tools to put somebody to work cost about 2,500 bucks.

David:

And just the tools.

Fletcher:

Yeah, and we’re like an office based environment.

David:

Yeah.

Fletcher:

So I didn’t have to buy uniforms or actual tools.

David:

And I don’t remember taking a drug test or a background check, so those things [crosstalk 00:06:02]

Fletcher:

Yeah, you add those in there. Assessment test costs, other kinds of costs. And that doesn’t even include advertising, so if I threw advertising in there, I’d say our hard cost just to hire one professional hiring consultant in our business, probably hovering around that 4 to 5,000 dollar range.

David:

Yeah. Wow, and that’s just the hard costs, right? We haven’t-

Fletcher:

Just money spent, literally spent to get somebody in a desk.

David:

… okay. All right, so we did hard costs, and the others. Do you feel like soft costs is your next step here or?

Fletcher:

Yeah, I think the soft costs start, I like to probably call them soft costs start to kick in on the onboarding or the training phase.

Fletcher:

Somebody’s gotta spend their time showing this person where the water cooler is at, just how to use the tools that they’re given, whether it’s a hard tool like a wrench or a vehicle or it’s a software tool that they’re using in their job.

Fletcher:

Showing them just how the company works, the processes, like I said, where the water cooler is, how the copy machine works. All of those things just are taking time out of somebody else’s day that cost you money. Directly, that hourly wage, right?

Fletcher:

And then, just that direct training cost so hiring a customer service person, somebody’s gotta be training these people, and so that’s just a pure cost. Maybe it’s a formal, one week onboarding program with heavy training, or maybe it’s a job shadow kind of thing where they’re shadowing somebody else, or the trainer is shadowing the new person. It just costs, hourly, hourly.

David:

Yeah, and I think hiring managers and business owners would like to see a job shadow as, well, my people get to keep doing what they’re doing exactly as they’ve been doing it, and someone’s just behind them, but in reality, they have to take it slower, they’re explaining things, they’re repeating steps, they’re going back.

David:

It’s not just another day in the life for your employees, they really are probably at 50 to 75 percent of their-

Fletcher:

Maximum capacity, probably, yeah.

David:

… yeah.

Fletcher:

I think there is some benefit to it, though, in that sense. It is a cost, right? But I think it’s a cost that obviously you’re investing in your new person, so yeah you got to make this investment.

Fletcher:

And that hopefully is gonna work out, and that person is going to be very productive for you, but also the person doing the training. It’s an opportunity to make them better, really. Teaching or learning how to master something, my father always told me, see one, do one, teach one type approach.

Fletcher:

So an existing employee has been shown how to do it, hopefully they’re doing what they were shown to do, and now this is an opportunity to take everything that they’ve learned over whatever period of time, internalized, and now teach it to somebody else.

Fletcher:

When they get that opportunity, it’s really valuable to the teacher. When you’re forced to teach somebody else how to do something, it also forces you to really think about what it is that you’re doing and how you do it.

Fletcher:

And I think a lot of times, at least I feel from my experience, I learn a lot about what it is that I’m teaching when I’m teaching.

David:

Yeah, right, yup. Okay, so soft costs would be kind of training, onboarding, time spent even interviews. If you’re interviewing lots of candidates and how much time you’re spending there, your hiring manager’s time. Sourcing, finding candidates, all that stuff that goes into it.

David:

Now as we talk about the productivity costs or the operational costs, we kind of touched on it a little bit in the soft costs, and I want to remention something you just said, which is this is an investment. So for people listening, you are making an investment. We’re not trying to list out all these costs to scare you away from hiring, obviously hiring means you’re growing and that’s a good thing.

David:

So we’re not scaring people away, but I think we do want to shed light on just how much money is being invested and how serious of a thing it is to hire a single individual. There’s a lot of weight and you should be giving a lot of-

Fletcher:

At any level, too, really.

David:

… yeah, right.

Fletcher:

Any, entry level, all the way. Obviously at the higher levels, some of these other costs become even more exaggerated or maybe even somewhat harder to pin down what they are.

Fletcher:

We started talking about opportunity costs and costs of not having, related to lost production or cost of not having the position filled, emotional costs. And the unintended consequences is the higher up the chain in terms of level of responsibility, those costs get higher, but also harder to measure.

David:

The implications are a lot wider and trickier to, yeah.

Fletcher:

Yeah, so maybe we’ll focus on that a little bit, but we primarily want to focus on, say, more of like a general, mid-level, entry level individual contributor type of role.

David:

Sure.

Fletcher:

I think it’s a lot easier if we begin to use some kind of examples.

David:

Okay, so let’s take, I mean is a call center, customer service rep, or maybe like an office administrator?

Fletcher:

Those ones are tough. So administrative folks are the hardest.

David:

Okay.

Fletcher:

Or one of the harder ones, along with those executives.

Fletcher:

The ones that I think that are the easiest for this analogy, I like to use customer service because that’s kind of a, it can be a difficult one to understand the costs, opportunity costs lost there, but I’d like to say like a production worker.

David:

Okay.

Fletcher:

Think about a production worker, somebody who makes something in a factory, right? And we can really simplify the terms here, or the concepts that we’re talking about, but at the end of the day, the opportunity cost is largely focused around this lost production concept.

Fletcher:

How long does it take when you hire a new customer service representative or a new production worker or a new sales person, I like sales people, that one is real easy to show the lines.

Fletcher:

But it could be an administrator and it could be an executive, too. Or any other role. How long does it take for that person to become 100 percent productive? In other words, producing at the same rate or volume or activity level as the average person in this job inside of your company?

David:

Yeah. I feel like most of us would like to believe it’s gonna take maybe a month or two, probably realistically that is gonna be upwards of six months to beyond, right?

Fletcher:

Yeah, well the other episode we’re gonna be doing shortly is why new hires fail, so you bring up one of the topics, stay tuned to that one ’cause I think we’re gonna talk a lot about that concept that you’re talking about, you say a month or two, right?

Fletcher:

Just for arguments sake, entertain me, we’ll go through that in more detail another day, but I generally think, and this is from my own experience. I think I’ve had like four jobs in my entire life, 36.

Fletcher:

If I’m real with myself, it’s taken me basically at least a year to really get comfortable and producing at a fairly sufficient or high level inside of those jobs. Probably more like two years to be a higher performer in those jobs.

Fletcher:

In fact, I took over a manufacturing sales service and administration operation at one point in my career, in my life, and I came in as a leader and it took a year before I figured it out. And it took, not until the second year did we start seeing results.

Fletcher:

It’s like John Gruden in the Raiders.

David:

Touchy subject for some people there, Fletcher.

Fletcher:

Yeah, for some people, yeah. So we’ve all been there, NFL team gets a new head coach, new GM, right? Or a sports team and first thing that happens is they have a horrible year, right?

Fletcher:

They’re recruiting new players, they’re figuring out the processes in their system, they’re trying to get everybody bought on and inboard, so we start to talk about the managers. I love to use sports teams as an example, in theory, a lot of times that first year that head coach is onboard, they are awful.

Fletcher:

How much money are the raiders gonna lose this year for being awful?

David:

Right.

Fletcher:

Right?

David:

Yup.

Fletcher:

All in hopes that they’ll be amazing next and the year after, and hopefully the year after for nine more years, after his 100 million dollar contract comes up in ten years.

Fletcher:

I think this is a really important point. I think you can measure it, again, like the same way I measure it. How long did it truly take you to become an expert in your role that you were assigned?

Fletcher:

I think it’s about year. Flat out. Now maybe, at first, it scales up. Maybe at first, I’m only 10 percent productive, and then I become 20 percent. Maybe by the ninth month I’m like 80 percent productive, but probably not until that year can I say I’m fully, 100 percent productive, so let’s just say on average a new hire is on average only 60 percent productive for the first 12 months that they’re on the job.

David:

Okay.

Fletcher:

Let’s say they make widgets, all right? They’re a machinist, and every widget is worth 100 dollars that they produce. So for every time I produce a widget, it’s worth 100 dollars and then we can go out and sell it for that amount.

Fletcher:

So now our company generates 100 dollars of revenue, of top line revenue at least. And let’s say, an average production worker can do 10 widgets a day, that’s a 1,000 dollars worth of widgets in every day. So that’s an average, solid, normal performer in this job.

Fletcher:

If it takes a new person a year to become fully productive, until then they’re 60 percent productive. That’s 400 dollars worth of widgets every day that that person doesn’t produce and there’s something like 200 working days in a year. So what is that?

David:

80,000?

Fletcher:

80,000 dollars worth of widgets that they didn’t produce in the first year because it took them a year to get to full capacity.

David:

Is it 80 or did I, is it 8,000? I’m really trying to check my mental math. 80,000 sounds like a lot.

Fletcher:

So 400 times 200.

David:

No 2,000, right? Weren’t we at?

Fletcher:

Yeah, 2,000 a day, right?

David:

Yeah. Wait.

Fletcher:

400 times 200. 200 working days and 400 dollars per widget.

David:

Yeah, [crosstalk 00:17:49] 80,000, yeah.

Fletcher:

Yeah, 80,000 dollars.

David:

It’s crazy.

Fletcher:

So I like the customer service example as well ’cause that’s a harder one to sort of get your head around. A customer service person doesn’t necessarily make me any money. All they do is they receive calls and trouble calls or questions about their, let’s say it’s a banking customer service person.

Fletcher:

Now they do sales, too, but let’s just say for this example they don’t. They’re just helping people figure out their account balances and pay their bills.

David:

Right, yeah.

Fletcher:

So let’s say that person can handle 50 calls a day, a fully functioning, producing, productive customer service person. And let’s say they’re only at 60 percent of their capacity. Or let’s do an even easier math, 50 percent of their capacity.

Fletcher:

So instead of doing 50 calls a day, they can only do 25 calls a day.

Fletcher:

How do I then fulfill my full quota of calls that I need to take care of everyday in order to keep my customers serviced?

David:

Right, you’re pulling in from maybe their supervisor or yeah, a colleague.

Fletcher:

Or double. I got to hire two people to do the job of what really one fully performing person can actually do. So this is where the cost of retention can be big.

Fletcher:

So say I hire a customer service person and I’ve trained them and then a year later, they’re finally up to a 100 percent production, they’re doing 50 calls a day, and they quit.

Fletcher:

I now need to hire two people to refill that position. To get the same amount of production out of that desk.

David:

Which-

Fletcher:

So instead of paying 50,000 dollars a year, it’s costing me literally 50,000 dollars a year more to get them up to speed.

David:

… right. Yeah.

David:

So we’re at, where does that put us? We have our hard costs, we have our soft costs, we have our lost opportunity.

Fletcher:

Production costs.

David:

And productivity.

Fletcher:

When that productivity can be direct like the number of sales a person does, number of widgets that they create that you then sell to extra costs needed to cover a necessary business function like, say, customer service.

Fletcher:

And then we talked a little bit about the leadership aspect, which that’s huge numbers, we can’t even begin to figure out what those are, but use that sports analogy, maybe that’ll help you think about how much that costs you to put a new leader in place.

David:

Yeah. Yeah. So it’s a lot. So I feel like that pretty well sums it up, were there any other?

Fletcher:

Well, I think now we start to get into the catch 22 here. What is the cost of not filling that position?

David:

Interesting.

Fletcher:

It’s double.

David:

Right.

Fletcher:

Right? At least for the direct producers, like the machinists and the sales people, right?

David:

Right.

Fletcher:

If I can have a machinist, and they can create 10 widgets a day at a hundred dollars a widget, that’s a 1,000 dollars a day for everyday that I don’t have a machinist in there making widgets, I’m losing a 1,000 dollars a day.

David:

Yup.

Fletcher:

Yeah. So you gotta have a sense of urgency to get the right people in the place, but you got to make good decisions because putting the wrong one in place can cost you just as much.

David:

Yep. Yep.

Fletcher:

There’s your catch 22.

David:

Yeah. Right. So you gotta have urgency and make good decisions. How do you do it? How do you do it? How can you have both?

Fletcher:

Well, that’s the nut we’re all trying to crack, but continue to listen to our podcast, we’ll talk about that.

David:

Right on.

Fletcher:

Many other episodes or our previous episodes, we’ll continue to explore that.

David:

Cool. Well Fletcher, thanks for walking us through some costs of hiring, we’ll be back for some, what’s coming up on our docket here, we talk about onboarding new hires and how that can go wrong, terribly wrong, and hopefully how we can do it better.

Fletcher:

How do we get people more productive, faster.

David:

Yup.

Fletcher:

That’s, I think, our next episode.

David:

Yup. So very cool. Well everybody, hope you got something that you can take away from this week’s podcast and look forward to reconnecting with you next week.

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