How to Calculate the True Cost of Employee Onboarding

By on Wednesday 22nd August 2012 in HR Blog, Sales

In this week’s breakfast presentation “Creating Essential Bonds with Your New Employees” By Anthony Sork from Sork HC, Anthony talks about HOW to calculate the true cost of employee onboarding

How to calculate the true cost of employee onboarding

Here’s a quick calculator to work out the true costs of employee onboarding.

1:  Add up the direct costs of employee onboarding
Include everything from making the decision to hire through to the end of your probationary period.  Jot down the estimated cost of each activity.  You may want to break this down into an hourly figure.

Here’s a list of direct costs to get you started:

  1. Position review
  2. Advertising costs
  3. Recruitment agency fees
  4. Cost of interviews
  5. Psychometric profiling
  6. Aptitude testing
  7. Reference checking
  8. Administration
  9. Letters of offer
  10. Employment contracts
  11. Labour costs of recruitment staff
  12. Induction costs
  13. Training and up-skilling costs
  14. Salary of the new employee during the period that they do not contribute

2:  Now add up the indirect costs of employee onboarding.
These are the “hidden” costs that are often overlooked or not considered at all.

Some additional cost are list below, but the cost in your business might be different

  1. Lost productivity (position):  Here we’re referring to the lost productivity of the actual position or role we’re onboarding for.  We need to factor this in based on average contribution of the position whilst it is vacant AND whilst the new employee is coming up to speed.  We can cover the period of 1 month before a new employee is hired, and 3 months after they are recruited.
  2. Lost productivity (personnel):  Here we’re referring to the lost productivity of everyone involved in the recruitment/onboarding/upskilling process based on average contribution.  Include the hiring Manager’s time & HR’s time at a minimum.
  3. Lost opportunity:  For example, missed sales opportunities, or for those in non-revenue producing roles, we’re talking about missed opportunities to contribute to the company’s profits in an indirect way.
  4. Impact on team morale and engagement

Therefore:  Direct costs + indirect costs = total cost onboarding
Sork HC research & calculations shows that the average investment associated with finding, recruiting and up skilling new talent to a minimum performance standard exceeds $100,000 per new employee over their first 3 months of employment.

This means that every time you bring a new recruit onboard, you are investing at least $100k into the onboarding process.

The risk associated with this investment can be managed,

To understand the risk to your onboarding investment, calculate how long it takes to pay back this $100,000 and achieve break even on your new employee.  Calculate this figure based on average profit contribution per employee. Our research indicates that an organisation will take between 12 and 18 months to achieve a return on their onboarding investment.

The picture could get very much worst if an employee leaves within the12-18 month period, add to any financial loss the replacement costs of hiring another employee.

3:  calculate your break even point (important)

Here’s how:Direct costs + Indirect Costs = Total cost of onboarding
Company Profit/FTE = Average Profit Per Person
Average Profit Per Person/52 = Average Weekly Profit Per Person
Total Costs/ Average Weekly Profit Per Person = number of weeks to achieve break even.

It’s important to know when your business achieves break even on your onboarding investment.  Every day after this represents a return on your investment.  If you determine that break even is at the 12 month point, then any employee who leaves your business prior to this time equates to a financial loss for your business.

Click here for an additional information brochure

Written by Anthony Sork – www.sorkhc.com.au

 

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