newemployee

The Cost of Hiring an Employee

Replacing an employee can be an expensive undertaking for a business regardless of the industry concerned.

Oxford economics carried out a report that considered the cost implications of staff turnover across five diverse sectors: Retail, Legal, Accountancy, Media & Advertising and IT & Tech. Their findings revealed that replacing a member of staff can potentially cost a business in the region of £30,614. [LS1]

The Chartered Institute of Personal Development (CIPD) has reported that while this figure may startle many business owners and directors, the majority of employers do not calculate the specific costs of employee turnover and the overheads related to this ‘churn’ beyond the act of actually appointing a new person.

This often leads to recommendations from experts that businesses should carefully monitor retention rates and reduce staff turnover to a minimum.

Read on to find out:

  • The true monetary cost of replacing an employee
  • The hidden costs associated with staff turnover often overlooked by employers
  • Strategies for improving staff retention

How much will a new employee actually cost?

The cost of hiring a new employee goes beyond the advertising, interviewing, screening, and hiring process. Employers need to consider the added monetary outlays of on-boarding a new employee as well as any training and management time that is required.

On average businesses spend £5,433 on the associated logistical costs of hiring, with various activities contributing, including temporary cover (averaging at £3,618), interview time (averaging £767), recruitment agency fees (averaging £454) and advertising and HR resource time (averaging £492).

Aside from the physical expenses, employers should be prepared to see a drop in productivity during the transition period. This can vary depending on industry, managerial support, induction training, the seniority of the role and the experience and aptitude of the new recruit.

Research has shown that on average new employees within small and medium sized enterprises (typically sub 250 employees) take 6 months to reach target efficiency, compared to 7 months within larger businesses with over 250 workers.  The same report also notes that while optimum productivity can be reached inside of 24-28 weeks, it can very often take a new employee up to two full years to reach a comparable output as an existing member of staff.

The knock-on effect of staff turnover can also result in disengagement and a productivity dip amongst other employees. While some staff turnover is inevitable, businesses ought to monitor whether their employees are feeling disengaged with the business and their day to day duties regularly, although more so following periods of increased staff ‘churn’.

Penny Loveless, director of Pecan Partnership, which has designed change programs for NatWest, Getty Images, Britannia Building Society and GlaxoSmithKline says: ‘…engagement is a cultural matter. Leaders create the conditions for engagement. It is down to the determination of leaders to go beyond the point at which employees appear to be content’.

Retaining top talent:

The CIPD defines retention as the extent to which an employer retains its employees and say that it may be measured as the proportion of employees with a specified length of service (typically one year or more) expressed as a percentage of overall workforce numbers.

Whatever the actual costs, both physical and resulting losses in output and managerial time, there's little doubt that retaining or even retraining staff is more often than not a far more cost-effective resolution than replacing a team member.

Many studies have identified strategies that employers can harness in order to improve their employee retention rates.

These approaches include safeguarding that work undertaken is meaningful and challenging. Acas identifies one of the main approaches in improving retention rates is to ensure that work is 'meaningful' and makes full use of an employee's skills, abilities and potential.

While the practice of ensuring that this is front of mind and upheld will differ between businesses and varying industries, typically this might encompass keeping work stimulating and diverse, and providing ongoing ‘training opportunities so that employees feel they are developing and improving.’

Can staff turnover ever be valuable?

Despite the associated costs with regards to replacing an employee within a business, many experts assert that businesses should be less reluctant to lose a ‘disgruntled, underperforming employee whose skills are outdated’.

Edward E Lawler, a Professor of Business comments: ‘…indeed, the turnover of some employees may end up saving an organization more money than it would cost to replace that employee’.

He adds that in some cases, ‘it produces an organization that is more agile and better able to adapt to the rapidly changing business environment that most organizations face today’. With that in mind, the turnover of some employees may end up saving an organization more money in the long run than it would cost to replace that employee. 

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