Do the maths! How to calculate the true cost of employee onboarding

The cost of attracting top talent is scary enough. Recruitment fees alone can start at 12% of  your new employee’s salary and head north depending on how much you pay them. The real cost however, of losing your staff in the early days of hire, is much higher than you think.

If you flunked out in maths class, don’t despair.  Here’s a quick lesson by Shiraz Contractor-Papas (our Product Manager - Asia Pacific) on how to calculate the true costs of employee onboarding.

Step 1: Add up the direct costs of employee onboarding.

This is the easy part.  Include everything from making the decision to hire through to the end of your probationary period.  Grab a piece of paper and 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

Do you have a headache yet?

It’s about to get worse.

The real cost of employee onboarding is actually much higher than the figure you just came up with.

Step 2:  Now add up the indirect costs of employee onboarding.

These are the “hidden” costs that are often overlooked or not considered at all.  We’ve all been guilty of neglecting these…

Here’s a list to get you started:

1. Lost productivity for the 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 for hiring 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

At a minimum, you should find that your indirect costs would be at least the same as your direct costs.

Therefore:  Direct costs + indirect costs = total cost onboarding

Our research and calculations show 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.

Don’t roll the dice or cross your fingers that everything will work out for the best.  The risk associated with this investment can be managed, but most organisations fail to do this effectively.

To fully understand the risk to your onboarding investment, you need to calculate how long it takes to pay back this $100,000 and achieve break even on your new employee.  You should 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.

In addition, you need to be aware of your employee attrition rates within this 12-18 month period, and add any financial loss to the replacement costs of hiring another employee.

We also need to factor in how long you need to retain an employee for in order for them to “pay back” the initial $100 investment and break even.

Stay with me…

Step 3: Now calculate your break even point (This bit is critical)

Direct recruitment costs + indirect Costs = Total cost of recruitment

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 Return On Investment

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.

If you think of it like this, investing in the Employee Attachment Inventory (EAI) for your new hires makes perfect cents.

We’re sorry about the pun.

Class dismissed.

Ms. Shiraz Papas.

Views: 3367

Comment by Bernard Keith Althofer on February 10, 2012 at 8:21

Interesting calculations that should be beneficial to organisations.  Unfortunately, there may be organisations who really don't have any way doing these calculations with the 'costs' being absorbed into daily operations.  It might well be the case that some organisations view this whole onboarding as a cost, and not as an investment.  If mindsets change, and everyone understands what is involved in getting a return on investment, then maybe all those involved will provide just a little more in each process that they have some responsibility for.

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