When a business decides to hire a new employee, it must consider the cost. When someone leaves the organization and a replacement is needed, there is also a cost. In addition to the salary and benefits, there are a number of other costs, such as recruitment, the need to create a new workspace, equipment, training and in some cases, relocation expenses. There are many variables involved in calculating the exact cost of a new hire.
Hiring for New Positions
When an organization creates a new position, it incurs costs to develop a job description and salary structure. If there is no work space vacant, there may be remodeling costs or rental for an off-site work space. The new employee may need outside training, especially if the new position has responsibilities with which no one else in the organization is familiar. Some organizations provide their employees with equipment, uniforms or tools that must be purchased for a brand new person.
Replacing an Employee
Replacing an existing employee involves two different types of costs -- direct and indirect. Direct costs are the easiest to calculate and include advertisements, recruiting fees, sign-on bonuses, salary and benefit costs. A salary increase may be necessary to attract qualified applicants. Indirect costs are difficult to quantify. A trained employee takes his knowledge and skills with him. The organization will incur lost productivity and there is a high potential for mistakes until the new employee achieves the same level of skill. However, calculating those costs may not be easy or even possible.
It may cost as much as 150 percent of the salary to replace a management position, according to a February 2012 article from Dun and Bradstreet’s Business Research website. The Institute for Research on Labor and Employment at the University of California at Berkeley reports average cost to replace an employee for all categories of workers is about $4,000. The IRLE notes that blue collar and manual workers can be replaced for an average cost of $2,000, while the average cost for managerial and professional employees may be as high as $7,000.
Some professions may incur much higher costs than the average, especially when indirect costs are included. It may cost as much as $150,000 to replace an information technology employee who earns a salary of $60,000 a year, according to James Del Monte of JDA Professional Services, Inc., one of Houston’s leading IT staffing firms. Much of the expense is in indirect costs such as loss of training, loss of institutional knowledge, productivity losses, consulting fees and overtime expense. Del Monte, a Certified Employee Retention Specialist, recommends that employers focus on retention to decrease turnover.
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