Question: Recently you addressed the issue of searching for new employees and the various methods of recruitment. Currently, we are a company with 10 employees running three routes per day and a small special event presence. We are planning to add another route driver and another administrative employee. What are some of the factors that we should consider in determining the cost of new personnel?
Answer: One lesson we learned as we began our business is that most actual cost includes underlying hidden costs that need to be identified. Whether taken into consideration or not, these underlying costs will impact your financial performance. We have heard business costs characterized as “visible” and “invisible” and this is how we will present them here.
As your company is expanding, we will address the actual costs of hiring new employees from both a route service and an administrative perspective. In addition, as you expand and grow, current employees may also resign from your company. There are cost considerations in replacing employees as well. Employee retention plays an important role in your company’s financial position.
COSTS ASSOCIATED WITH NEW HIRES
Workforce needs and responsibilities
After taking the time to determine your workforce needs, consider the specific responsibilities of the new position. These are “invisible” costs as they involve management’s time and discussion with other employees. Creating a written job performance plan as a result of these discussions is a labor cost to some employee, either administrative or management.
Advertising the open position
As we covered in last month’s column, a variety of options are available to promote the new job opening from traditional newspaper ads to new online job websites such as Indeed.com and ZipRecruiter.com. These expenses are “visible” as your will receive invoices from the various advertising groups.
Conducting interviews
“Time is money” and either management or human resource personnel must conduct these interviews. Keep in mind that you must consider all of the time expended for all of the interviews and not just the time with the eventual new hire. This “invisible” cost can be quite time-consuming depending on the number of interviews conducted.
Background checks
For many PROs this is a prerequisite for hiring. Various agencies provide this service with the goal being to verify basic information such as education and work experience. It can also check for any criminal history or past identities. A “visible” expense.
Pre-employment physical and/or drug screen
Prospective route service drivers are required to obtain a DOT Medical Card. Minimum physical requirements including good overall health and a clean drug screen are objectives that must be achieved. This “visible” expense is yet another in the hiring of a new employee.
Compensation and benefits
Many employees and managers concentrate on the compensation rate as the only “visible” expense for each position in the company. Benefits are not only “visible” but extremely relevant in determining the true compensation of an employee. From our experience, we had several employees who would state that they made X dollars per hour. While true, we would also emphasize that health insurance, a 401(k) plan, vacation, paid sick leave, a business cellphone and a uniform service were important benefits added to their hourly pay.
An interesting fact from the U.S. Bureau of Labor Statistics is that in 2020, benefits made up 32% of a small business employee’s total compensation. This number is an average and depends on location of the business, number of employees and type of benefits offered. This figure does, however, illustrate the point that total employee compensation is significantly more than the salary amount only.
Employer expenses
Employers are responsible for paying their portion of each employee’s payroll taxes, including social security. This cost should be factored into the calculations for the cost of a new employee.
Each new hire will require the company to pay additional workers compensation insurance. The rate for route service drivers is higher than that of administrative and sales personnel but this insurance must be obtained nonetheless.
Equipment required for new employees
It is entirely possible that new equipment may have to be purchased to accommodate growth. The addition of a route may require the purchase of a route service truck. A new route driver may need a new electronic device to go in the cab. Some companies issue tablets or similar devices for route and service programs. Uniforms may be required for route personnel as well as personal protective equipment such as hard hats, reflective vests and protective face shields, among other items.
A new office employee may require the purchase of an additional computer and office furniture. Company-issued cellphones may also necessitate the purchase of one of these devices for the new employee.
If new employees are replacing former employees, these expenses may not be incurred.
Training and productivity
This is unquestionably the largest “invisible cost” most PROs overlook. Depending on the job requirements and the experience level of the new employee, the training process can be costly. The key point is that for a period of time the new employee will not be producing very much value for your company. At the same time, the person in charge of training is being taken away from the key elements of their job.
The amount of time a new employee takes to be as productive as their counterparts in similar roles can vary widely. It may be a matter of days to several weeks until a new hire is completely productive.
We found an interesting 2021 article online from Investopedia entitled “The Cost of Hiring a New Employee.” Given the fact that new employee experience levels, the specifics of the job, and company policies and procedures can vary widely, this publication produced some average productivity rates for new hires. According to their data:
1. The first month after training is completed, new employees are functioning at 25% productivity.
2. Weeks 5 through 8: Productivity goes up to 50%.
3. Weeks 9 through 12: Productivity is 75%.
4. Following the 12 weeks (roughly 90 days): “Companies can expect a new hire to reach full productivity.”
EMPLOYEE RETENTION
Once all of the “visible” and “invisible” hiring costs are analyzed, you’ll realize employee retention is a key element in the success of your business. Experienced and satisfied employees increase and maintain satisfied customers.
Several suggestions from PROs when discussing this topic over the years include:
1. Create thorough and comprehensive written job descriptions for each job within the company.
2. Incorporate these job descriptions into written performance plans shared with the employee far in advance of any performance review.
3. Establish an environment where employees are valued and encouraged to make suggestions and to share their thoughts and feelings. This open communication benefits both the employee and the company.
4. Incentives motivate performance. Safe driving programs, positive customer feedback, suggestion programs and referral programs for new employees are just a few of the examples that PROs develop.
5. Additional benefits based on service time with the company. Some companies offer health insurance after a certain time period as well as vacation time and eligibility for 401(k) programs and other benefits.
6. Establish career paths to encourage long-term employment with the company. Employees are motivated to maximize their performance over a period of time to advance within the company. Avoid the sentiment among employees that “I have a dead-end job.” Strive to work with your employees to retain their services where possible and all parties will benefit.
FINAL THOUGHTS
Employees are the most important asset of any company. Hiring new employees is an investment of time and money with many “invisible” costs. Once hired and trained, employee retention should be the goal of any PRO who is looking to maintain an experienced staff and satisfied customers.
