Calculating The Strategic "Cost of Hire" in Startups

The Strategic "Cost of Hire" in Startups

In the fast-paced world of startups, every decision carries significant weight, and none more so than hiring the right talent. Every new team member not only shapes the company culture but also wields a substantial influence on the bottom line. Understanding the true cost of hiring, often referred to as the "cost of hire," is paramount. In this blog post, we'll explore the essence of strategic recruiting, how to calculate the cost of hire, and its pivotal role in saving your startup valuable dollars.

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This blog was inspired by the Shopify "Meeting Cost Calculator" tool and the age old idea of 'time is money'

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Unveiling the Cost of Hire

The "cost of hire" encompasses all expenses associated with finding, attracting, and onboarding a new employee, including:

• Recruiting and Job Posting Costs: Advertising, job boards, sourcing, and related expenses.
• Hiring Agency Costs: Fees if you employ a recruitment agency.
• Interview Time: The hours spent by your interviewing team or business leaders.
• Candidate Testing and Background Checks: Costs associated with assessments and checks.
• Onboarding Costs: Training and integration expenses.
• Relocation Costs: If applicable.
• Lost Productivity: The time it takes for a new hire to become fully productive.

Understanding the cost of hire is crucial because it directly impacts your startup's budget. If costs are too high, it may limit your ability to hire and grow. On the other hand, understanding and controlling these costs can lead to significant savings and enable more strategic hiring decisions, or even hiring someone a little more senior than you anticipated.

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How to Calculate the Cost of Hire

Now we get to the juicy bits!

Calculating the cost of hire involves adding up all the expenses associated with the hiring process. Basic math.

Let's break it down step by step with an extremely simplified example:

Imagine your startup is hiring an Accountant with a base salary of $100,000. For this example, we'll assume you used a recruitment agency and didn't conduct any job postings, sourcing, scheduling, candidate testing, background checks, or relocations. We will also simplify the salary figures for clarity.

Step 1: Calculate the hourly rate for each person involved in the hiring process. Assuming an 8-hour workday, flat $100k salaries for every interviewer (I know this is silly but, this is just an example, so stay with me!), and 250 working days in a year:

• Hourly Rate = Salary / (8 hours/day * 250 days/year)
• Hourly Rate = $100,000 / (8 hours/day * 250 days/year) ≈ $50/hour

Step 2: Calculate the costs associated with each stage of the hiring process, assuming conservative volumes with industry standard conversion rates:

• Initial Screen: 12 candidates * 1 hour/candidate * $50/hour = $600
• Hiring Manager Call: 9 candidates * 1 hour/candidate * $50/hour = $450
• Interview with Peers: 6 candidates * 1 hour/candidate * 2 peers * $50/hour = $600
• Executive Manager Interview: 3 candidates * 1 hour/candidate * $50/hour = $150
• Hiring Agency Costs: $15,000 (this figure represents agency fees)
• Onboarding Costs: 10% of of Base Salary = $10,000 (this is a simplified estimate of the time taken to ramp)

Step 3: Add up all these costs:

$600 (Initial Screen) + $450 (Hiring Manager Call) + $600 (Peer Interviews) + $150 (Executive Interview) + $15,000 (Agency Costs) + $10,000 (Onboarding) = $26,800

So, in this simplified example, the cost of hire for the Accountant is approximately $26,800.

Another crucial cost is time: In this example, 36 hours. Almost an entire work week!

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This calculation also doesn't consider costs like job postings, salaries of your leadership team, candidate testing, background checks, or time spent on relocation. Keep in mind that these numbers can vary widely depending on factors such as location, industry, and specific hiring practices.

Understanding these costs empowers your startup to make data-driven decisions and optimise your recruitment process for cost-efficiency.

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The Hidden Costs of Hiring

There are less obvious costs associated with hiring. One is the cost of lost productivity— it takes time for the interviewing team to assess candidates and it takes time for new hires to reach full productivity. Another is the cost of a bad hire. If a new hire doesn't work out, you'll have to bear the cost of the failed hire plus the cost of recruiting and training a replacement.

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How Strategic Recruiting Can Save Your Startup Thousands

A systematic and strategic approach to recruiting can significantly reduce hiring costs. Streamlining interviews and creating structure around your measurement criteria means less time spent per hire and ensuring every passing vote comes with evidence and data, thus reducing the costs associated with the time spent by Interviewers and management.

Also, developing a strong employer brand can reduce recruitment advertising costs. When your startup is known as a great place to work, you'll naturally attract more candidates. This can reduce the need for costly job ads and headhunters.

Finally, effective onboarding can reduce turnover, saving costs associated with replacing employees. A well-planned onboarding program helps new hires to become productive faster, reducing the costs associated with lost productivity.

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Do you have experiences or questions about strategic recruiting and cost of hire?

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For more tips on how to optimise your recruiting process and reduce costs, follow me or reach out directly — we'd be more than happy to help!

ankit@start2scale.net