The Cost of Hiring a New Employee

Businesses often hesitate to hire new workers, even when they need them, due to the time, effort, and expense involved. They know that the cost of taking on a new employee is more than just the person's salary and benefits, which can be substantial on their own. But once you factor in the expense of recruiting, training, and more, the dollars really start adding up. Here's a look at the various costs a business can expect to incur in hiring a new employee.

The Cost of Recruiting

Simply finding the right person to hire can come at a hefty price in both money and staff time.

That can include the financial costs of advertising the job opening, plus the time costs of an internal recruiter, the managers conducting the interviews, and anyone involved in drug screens, background checks, and pre-employment assessment tests for new hires, notes business consultant Bill Bliss, president of Bliss & Associates Inc. Hiring an outside recruiter, as is often necessary, will add to the tab.

SHRM, the Society for Human Resource Management, estimates the average cost of recruiting a new employee at $4,700, although it can also run many times that, particularly for workers with hard-to-find skills or in tight job markets. Sometimes it can be several multiples of the employee's salary.

The Cost of Training

Recruitment is just the first step in the process. Once the right person is on board, businesses need to provide adequate training so the new employee can get up to speed and start producing for the company. While essential, training is also costly.

According to a recent study by Training magazine, companies spent $101.8 billion on training new and current employees in 2022-2023. That figure includes training budgets, technology spending, and staff salaries.

Training costs can vary widely depending on the size and type of business. On average, companies spent $954 per trainee in 2023, the magazine said. Small companies spent the most, at $1,420, while midsize companies spent $751 and large ones, $481.

The Cost of Salary and Benefits

The most obvious cost of taking on a new employee—their salary—comes with its own bundle of side items. Benefits range from the minor, such as free coffee in the employee break room, to the major, such as paid life insurance, disability coverage, medical and dental plans, tuition reimbursement...the list goes on.

The Bureau of Labor Statistics says that benefits are about 30% of a person's salary.

Reaching the Break-Even Point

The goal of all this investment is increased productivity. But it can take time for companies to see a return on their investment. A survey of 210 CEOs by Harvard Business School estimated that typical mid-level managers require six months to reach their breakeven point (BEP). In other words, the manager has to be on the job for more than six months for the company to start recouping its investment in them.

Bliss breaks down the productivity scale into these periods:

• Roughly the first month: After training is completed, new employees are functioning at about 25% productivity, which means that the cost of lost productivity is 75% of the employee's salary.
• Weeks 5 through 8: The level goes up to 50% productivity, with a corresponding cost of 50% of the employee's salary.
• Weeks 9 through 12: In this timeframe, the employee usually reaches a productivity rate of up to 75%, with the cost being 25% of the employee's salary.
• Following the 12-week mark: Companies can expect a new hire to reach full productivity.

The Bottom Line

Hiring a new employee isn't a decision that should be taken lightly, as it doesn't fall lightly on the company budget. But without workers, there isn't much work done, so even though the investment may make the company accountant cringe, the potential in return on a good new hire continues to make the investment worthwhile.