Recruiting costs

A mistake in the recruitment process that leads to an early employee resignation or dismissal can cost an employer between half and two-thirds of the employee’s annual salary.

This article is based on writings by Mike Toten, HR writer/consultant, from 2003. It has been updated and revised.
 
A mistake in the recruitment process that leads to an early employee resignation or dismissal can cost an employer between half and two-thirds of the employee’s annual salary.
 
Ms Sylvia Vorhauser, Director, Assessment Edge Pty Ltd, presented evidence of the costs during a presentation on behavioural interviewing techniques at the Australian Human Resources Institute’s HR Week event in Sydney in 2003.
 
Ms Vorhauser provided three examples of calculations — for employees on salaries of $35,000, $60,000 and $150,000. While her figures used precise cost estimates, the following summary has rounded these figures off.
 
Employee on $35,000
 
Total direct and indirect cost if this employee leaves within 12 months of hiring are estimated at $17,750, just over 50% of salary.
 
Direct costs amount to $8250 (advertising $1800, consultant fee of 15% = 5250, selection process — such as interpreting test results — $700, formal training/induction $500).
 
Indirect costs come to $5900 (interviewing time $300 for three applicants, informal training by managers and peers $3700, productivity until new employee reaches normal performance level after about 20 days $1900).
 
If the employee leaves within the first 12 months, extra costs amount to $3600 (payout based on four weeks’ pay $2900, performance management activities, such as meetings $700).
 
Employee on $60,000
 
Total costs if this employee leaves within 12 months are estimated at $33,000, or 55% of salary.
 
Direct costs come to $15,900 (advertising $2,700, consultant fee of 18%=$10,800, selection process $900, formal training/induction $1500).
 
Indirect costs are $10,700 (interviewing time $700, informal training $6700, productivity loss $3300).
 
If the employee leaves during the first 12 months, add  $6400 (four weeks’ pay of $5000, performance management costs $1400).
 
Employee on $150,000
 
Total costs if this employee leaves within 12 months are estimated at $98,800, about 66% of salary.
 
Direct costs amount to $57,000 (consultant fee of 30%=$50,000, selection process $2000, formal training/induction $5000).
 
Indirect costs total $26,000 (interviewing time $950, informal training $16,850, productivity loss $8200).
 
If this employee leaves during the first 12 months, the extra costs are $15,800 (four weeks’ pay $12,500, performance management costs $3300).
 
Although the above estimates represent very significant extra costs to an organisation, note that if anything they are relatively conservative estimates.
 
Other studies and comments by members of recruiting consultants have suggested that the total cost of replacing a professionally-qualified employee may be as much as the equivalent of one year’s salary, and for senior management employees it may be well over one year’s salary. 
 
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