The True Costs of Hiring Top Talent

In early October, I met with a prospective client—we’ll call him Bob— who told me he wanted to hire a VP of sales and four or five salespeople by the end of the year. He also said he planned on hiring another twelve reps in 2013. After discussing the requirements he had for his sales team, I asked him how much he anticipated he would have to pay a sales VP who had the ability to hire, develop, motivate, and manage a team of 12-16 sales people. Bob said, “I was thinking around $70K per year.” 

I didn't know if I should laugh or cry; he just didn't have a clue. 

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I explained to Bob what a VP of Sales of that caliber would actually cost, which is, on average, between $120K and $170K base, plus overrides. Bob then attempted to negotiate with me, as if I could decide what the market would bare. I explained to Bob that based on his budget, we would need to adjust his approach and hire a Director rather than a VP. He agreed and asked me to put together a proposal, which I presented a few days later. The proposal included two options:

1)    Contract Recruiting, which is based on 17% of the annual salary with a 50% retainer (my firm does not do contingency fees due to all the up-front and back-end initiatives that we perform that most recruiting firms do not)

2)    Recruitment Process Outsourcing (RPO)Model, which also includes several other services, such as career site management and on-boarding/training support. This proposal required a $4K/month retainer and then only a 10% hiring fee for each person we placed.

Bob pondered it for a moment. He then gave me a serious look and said he couldn't afford $4K/month. This response, along with his desire to hire a VP of Sales for only $70K, got me thinking: had he thought any of this through? Didn’t he realize that just one of the salespeople’s salaries would cost him more than that? Was this idea of building a sales team just some wishful thinking? Bob’s response clearly indicated that he had no strategy or plan for accomplishing his objective. 

I later thanked him for his time and explained that I was withdrawing my proposal because we could not support his (unrealistic) requirements. 

Hiring top talent requires an investment - in reality, time, and money.

Costs of hiring Top Talent

The first step in improving your ability to hire top talent is to understand and embrace the concept that people are one of the most important investments a company makes. And this is definitely a case of "you get what you pay for,” meaning, if you don't make an investment in planning, developing, training, and implementing a thorough hiring and on-boarding training program, then don't expect any great results.

To help put this into perspective, or actual dollars, the Society for Human Resource Management (SHRM) estimated that it can cost $3,500 to replace one $8.00/hour employee. And SHRM’s estimate was the lowest of the dozens of reports we reviewed.

Or use these calculations: to replace an employee, you can expect to pay 30-50% of the annual salary of entry-level employees, 150% of middle level employees, and up to 400% for specialized high level employees! These costs include recruiting, interviewing, hiring, training, reduced productivity, etc. 

Now think of a job in your organization where there has been turnover. Estimate this role’s annual average pay and the number of people in that role that you’ve lost.  For example, if their average annual pay is $40,000, multiply this by 125% of $40,000. This means it costs $50,000 to replace that person. If you lose ten people a year in that same role, then your replacement cost is actually closer to $500,000.

Most companies don’t view these vast sums as serious problems because they don’t have a process in place to calculate the actual costs. And often, this responsibility is relegated to HR, when in reality, it is the company as a whole that suffers. This financial burden starts at the top and works its way down to your bottom line. Some of the cost areas you need to consider include:

  • Recruiting (and this includes internal and/or external costs)
  • Interviewing (not just HR, but all the involved hiring managers as well)
  • Hiring
  • Orientation
  • Training
  • Compensation & Benefits
  • Lost Productivity (this can be a huge cost area that is typically not calculated)
  • Customer Dissatisfaction (this can be the most serious impact that is often overlooked)
  • Reduced or lost business (see #’s 7 and 8)
  • Administrative Costs
  • Lost Expertise
  • Exit Costs

You wouldn’t invest $50K in a software application for your business without seeking expert council and a having a well-thought-out strategy and plan. So why then would you make an investment in hiring and retaining top talent without the same effort and expertise?

To learn more about what it takes to hire top talent, download our free e-book,12 Steps to Successful Recruiting.

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