Ask Anne: The True Cost of New Hires

I read an article you wrote about the true cost of hiring an employee. It was an outlandish amount of money when you consider the cost of advertising, your time screening, interviewing, reference checking, putting offers together, and on and on. I have used these factors to help make decisions on jobs to outsource, hire through an agency, or keep as in-house hires. Are there other things I should be considering when I look at the cost of hiring a new employee?

What a timely question, since CBT is talking finance this month. While working with many companies over the last 30 years, I have found that most do not have systems to track the true costs. These true costs can include all types of things, and not just those you’ve mentioned: exit costs — the costs associated with someone leaving — include lost productivity, potential customer discontent, lost or reduced business, administrative costs, lost industry expertise, and more.

These costs are not always seen quickly when someone leaves a company. Often, it takes a year or two for a new employee to reach the productivity rates of an existing one. If your company has high turnover, it probably has low morale too, often leading to disengagement and loss of productivity. Customers do not generally call you up and tell you they are unhappy — they just start shopping for new vendors. In the worst case scenario, once they have found a new vendor, they quit giving you orders.

The bottom line is that it’s more expensive than you think, or want to know, to hire a new employee — unless, of course, the old employee was bad. In that case, you may reap the benefits in dollars, increased morale at your business, and happier customers.

My simple method: take every cost you can associate with the new hire and add 20 percent. The reason for an added 20 percent is that you really do not know how your customers will react when someone leaves your employ, or how much knowledge a new person truly has until they have been with you a few months. Good luck.

It is that time of year when I do my yearly evaluations and compensation planning.  Of course, the employees are all expecting bonuses and/or raises in their compensation. It has always been difficult for me to figure out who should get bonuses and what that amount should be. Also, how do I combat having to give raises at evaluation time?

I read a business publication called “Tips from the Top” and have picked up several ideas and tools to consider when developing plans. Here are a few I feel are important and address your question.

Bonuses:

The article on compensation suggested that you design an objective system for deciding what part of your company’s after-tax profit to put in a bonus pool. Then decide what portion of the pool will be paid out to each staff member. As a rule, the people who make you the most money get the healthier portion of the bonus (but remember who your most important people are: shipping and receiving, reception, etc).

Pay Increases:

Remember, you do not have to give a pay increase every time you evaluate a staff member. Perhaps you could put out a memo reminding everyone it is evaluation time; include an article that summarizes what an evaluation is, including that it’s not necessarily a time for pay increases.

Reflect on the Past:

Do this before giving any monetary increases: compile your company’s financials for the last five years and compare. You will likely be surprised by the results, and it can be motivating (sometimes deflating) to see just how far your company has come. Look at what is forecasted for the next year too.

Organizational Chart:

When looking at your organizational chart, you might consider a three-level pay grid or pay scale to determine your raise policy based on starting rate, job rate, and merit level.

• Starting Rate: The person hired is qualified but learning the basics of the job.
• Job Rate: For the person who is fully qualified for a position and meets the set expectations – it’s the base for the other levels. Someone hired at the start rate could reach the job rate level within 18 to 24 months of hire.
• Merit Raises: These allow staff members who remain in the same job to receive pay increases and allow the company to retain them. These are given for a job well done. Remember, merit raises are not the same thing as a cost-of-living raise.

Anne Williams is the president of JobFinders Employment Services. She is not an attorney. All content in this column is not guaranteed for accuracy and legality and is not to be construed as legal advice.