The Cost of Hiring a New Employee for Your SMB

Businesses are made up of people. Hiring new employees come with more costs than just their salary.

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When you start building your small business, a big question pops up early on. You’ll find yourself asking, “Is it time to hire a new employee?” Whether the answer is yes or no at any given time, it pays to know how much it’ll cost you to bring on a new employee. 

Of course, everyone’s job titles and salaries vary. But, there are associated (and often hidden) costs to hiring a new employee. In fact, Deloitte has shown that the average cost of a new hire is $4,000, but the price may likely vary. 

Here, we will break down everything you need to know about the hiring process, how to hire the right person, and the total cost of hiring a new employee for a small business.

Recruiting Has a Price

It would be great if the right candidate naturally showed up at your door when you are ready to hire. The truth is that there are many surefire ways to find the right person, but they take time and as such, have costs. 

The first step is to write out the job description, which will include a summary of the position, line items or bullets of their job responsibilities, and the required experience and/or education to fulfill the position. You can post the job description on job boards (there are likely to be fees for this) or across social media (can be free unless you pay to sponsor the post). Another option may be to hire a recruiter. However, this may be a more costly option than you are ready to take on. The average cost of a headhunter is $20,283. 

The Costs of Training

It’s no Denzel Washington movie when it comes to training day. Once you’ve recruited the perfect new addition for your team, you’ll have to invest resources like time, money and effort into preparing the new hire for their role. Training actually turns out to be one of the most expensive pieces of the new hire process. 

You could and should think of training as an investment. You are putting money upfront to hopefully reap dividends in the future, if all goes according to plan. On average, the cost of training a new hire is just north of $1,200 per employee. This number is calculated by quantifying the hard materials cost, as well as the time it takes a manager and fellow employees to get the new hire ready to go (to the point of 100% capacity).

The Price Behind Paperwork

Along with on-boarding comes the process of submitting paperwork and documentation, including but not limited to: health insurance, annual salary, benefits and the like. You’ll have to set up an approval process for the new hire to receive necessary paperwork and it to be properly reviewed. Many big businesses have this managed by a Human Resources department or have outsourced an HR team. As a small business, you may want to take this on by yourself to minimize the costs. If you do so, there are plenty of options for automated human resources management software on the market.

The Cost of Turnover

In business of any size, customer satisfaction tends to be a top priority. Equally as important is employee satisfaction and retention. Just like it costs more to acquire a new customer than retain an existing one (5x more in fact), the cost of turnover is like throwing money out the window. You invest time and resources into getting a new hire up and running so that they can hit the ground running. Remember when we said this is an investment that will only pay out if the employee reaches maximum potential? If an employee quits shortly after being hired, all the costs associated with on-boarding can be considered sunken. Corning Glass Works has found that an employee who attends a structured orientation program is 69% more likely to remain with the company for at least three years.

The Obvious Costs: Salary and Benefits

As a small business hiring a new employee, you probably have spent most of your time calculating a new hire’s costs based on their salary and benefits. Beyond their salary, you should also factor in the price of benefits like: medical and dental plans, retirement contributions, disability coverage, life insurance, tuition reimbursement and so on.

When Do Costs Even Out?

The break-even point for bringing on a new hire tends to take place by month six, at least for mid-level managers (according to Harvard Business School). This is based on the employee reaching their full potential by that time, as training, salary and cost of lost productivity even out.

How to Decrease Hiring Costs

The cost of hiring is not a one-size fits all calculation. Naturally, the salient costs like one’s salary varies greatly by location, hours of work, experience level, etc. But, as a small business, taking on any new costs is an important consideration. However, new hires may not be a cost you can fully avoid because at some point, the benefits of hiring someone to help boost productivity will outweigh the costs of not having a valuable team member. Here are some tips to help reduce the cost of new hires:

 

  • Advertise job descriptions on social media to maximize reach without incurring more costs 
  • Automate the HR process with software 
  • Leverage your network to try find the right candidate 
  • Find a cost effective provider for background checks 
  • Introduce a referral benefit scheme
  • Leverage alumni networks and job fairs 
  • Be as detailed as possible in your job description and requirements 

Make Your Money Work

Small business owners have a lot to manage. That’s why the consideration of hiring a new employee is one to take seriously. Devoting the right time and resources to find the perfect candidate can save you money in the long run. 

While the hiring process isn’t always the most quick piece of business, it often ends up being one of the most important. Give time to figure out the exact job description, necessary base salary and benefits, on-boarding process, training environment and overall employee experience. The goal is to find the right person who also feels you offer the right opportunity for growth and maximum potential. 

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