What is the Cost of Onboarding a New Employee?
When hiring, any company has to bear the financial cost of onboarding a new employee. There is no way to avoid the costs associated with the employee onboarding process, unless the company never hires again.
This article will discuss the cost of onboarding a new employee. The focus will not only fall on the cost of a complete onboarding process. In addition, we bring into the conversation the cost of failed or poor onboardings. We will show that regardless of how much money an employer spends onboarding you, the total cost will be much less significant compared to the cost of losing your talents and potential due to an ineffective onboarding process.
Cost of Onboarding a New Employee
A staff onboarding process is a complex, costly and time consuming process. This means that there is a sense of urgency for using onboarding metrics. This is a means of ensuring efficient resources expenditure and goal accomplishment.
First of all, recruitment alone could average $3000. Other analyses reveal a different kind of data. Hiring an entry-level employee is estimated to cost about 20% of that employee’s salary. This initial investment has to pay off in the long term. However, high turnover rates place additional pressure on companies. The more employees decide to leave their jobs very early in the employee life-cycle, the higher the cost for the employer.
In fact, 90% of new hires decide to stay with their new employer within the first six months on the job, according to SHRM. Additionally, 25% of new hires will resign within the first year. And 20% out of them will do so within the first 45 days.
This is a diagnosis for the job market as a whole. It also indicates that employee are unwilling to stay in jobs or companies that do not match their needs. Danny Nelms, President of the Work Institute highlights this very fact. “The rise in first-year turnover is a sign of the job market. Employees can easily go elsewhere if a job doesn’t meet their needs and expectations.”
The Cost of Onboarding a New Employee: What Does it Comprise?
It takes time and human effort to attract a job candidate and fully integrate them into a role and a company. This is inclusive of some obvious costs. For example, the costs of technical equipment (IT onboarding), training courses etc. But there are also some hidden costs.
Thus, when discussing the cost of onboarding a new employee, we cannot ignore the fact that it is a component of a talent acquisition process. It starts from the moment a job contract is signed to the moment the onboarding period concluded. and the employee has achieved maximum productivity, there are multiple expenditures to be considered.
Thus, a real estimate of the cost of onboarding a new employee, will also account for the preboarding stage. As such, let’s review the costs associated with the various stages of the new hire journey.
The Costs of the Preboarding Stage
- Paperwork costs represent the administrative costs attached to filling the required new employee paperwork. Some examples are benefits enrollment, tax forms, employee handbooks, NDAs, etc.
- Equipment set-up costs include both hardware and software. There are costs for ordering your workstation and any peripherals, phone, and other physical equipment. Licenses for any tools and software you will need to use in order to perform your job duties also need accounting for.
The Cost of the Onboarding Stage
- Training costs (both hard and soft skills) refer to the preparation of training resources, and the costs of delivering the training courses. You can read more in our article about the cost of training a new employee.
- Orientation Day costs could include the cost of breakfast and any other social event, costs of company swag.
- Time Resources from the hiring manager, IT professional, line manager and buddy also represent a cost. The working hours spent for guiding you towards productivity in your new job mean that these employees are away from their regular day to day activities.
Average Cost to Onboard a New Employee
When talking about the average cost to onboard a new employee, we should differentiate it from the average cost per new hire. The latter refers to the total cost of filling an open position. Thus, it includes all costs from the moment of drafting the job position and signing an employment contract. Furthermore, the cost per hire also includes signing bonuses, employee referral schemes, any travel costs, recruitment technology.
The average cost to onboard a new employee refers to the average cost of helping a new hire transition into their new role.
Estimates from SHRM’s Human Capital Benchmarking Report place the average cost per hire across organizations and industries at $4,125. The average cost to onboard a new employee is approximately $3,000.
Hidden Costs Associated with Onboarding a New Hire
We have previously included the most obvious costs of onboarding a new hire. But onboarding costs refer to more than just the expenditures on equipment and the salaries of those spending time training you, and helping you integrate.
When thinking of hidden costs of onboarding a new hire, we have to make some remarks regarding the salary you receive during your onboarding period. Your salary represents a hidden cost of onboarding due to a key fact. Achieving full productivity takes time for new hires. This reduced productivity implies a cost for your employer.
The Cost of Lower Productivity during Onboarding
As a new employees, you get less work done. This occurs simply because at the beginning of a new employment contract you are on a learning journey. You have a lot to figure out. And it does not exclusively refer to executing your role and fulfilling your responsibilities. Learning the ropes of a new company also refers to navigating communication channels, mastering the workflows and work tools. Furthermore, it also refers to establishing connections and trust with your coworkers and collaborators.
Actually, it can take up to six months or more for a company to break even on its investment in a new hire. Thus, until the breaking even point, your salary represents a de facto loss for your employer. Your salary is fixed as you advance from limited productivity at the start of your employment until full productivity once your staff onboarding process concludes.
A survey of 210 CEOs by Harvard Business School focusing on onboarding mid-level managers revealed some interesting insights about onboarding and productivity. Roughly after the first month, new employees are functioning at about 25% productivity. By weeks 9 through 12, the new hire reaches a productivity rate of up to 75%. Thus, in the first month there is a cost of lost productivity of 75% of the new hire’s salary. And by week 12 the cost diminishes to 25% of the salary.
Cost of Onboarding a New Employee
A hidden cost of onboarding comes from the reduced productivity that is typical of ramp-up periods, the time during which a new hire is still learning their role and getting acclimated to the work environment.
The Cost to Onboard a New Employee is Much Lower than The Cost of Lost Talent
When a company invests weeks of resources, both time and effort, into onboarding, only to see an employee quit six months later, they have wasted all of those resources. So, companies have to be aware and proactive when making strategies for talent retention. And the first place to start is making sure that your onboarding process convinces you of being in the right place, at the right time.
“One of the biggest questions a new employee has is: ‘Did I make the right choice?’ And if HR, the management or the company don’t offer an answer for this question, then the employees are at a high risk for premature turnover. We risk that a part of these employees will become one of those 25% who leave within a year. Or the 20% who leave within 45 days. Or the 4% who don’t show up or leave after the first day.” — Stefan Sjørslev, Pre & Onboarding Specialist at introdus.
Pre & Onboarding eBooks
One of the biggest questions a new employee has is: ‘Did I make the right choice?’ And if HR, the management or the company don’t offer an answer for this question, then the employees are at a high risk for premature turnover.
—Stefan Sjørslev, Pre & Onboarding Specialist in ‘Your Pre & Onboarding Buddy’ eBook.
The total cost of turnover per employee depends on the level of experience. Replacing an entry-level employee costs 30% to 40% of their annual salary. For a mid-level employee the cost goes up to 150% of their salary. And for a highly skilled employee the cost can be up to 400% of their salary, according to Sparkbay, an employee retention solution.
Why are Turnover Costs so High?
Turnover costs are high because they encompass the costs incurred by:
- the reduced productivity of an employee in the weeks leading up to their departure.
- the lost productivity in the time between the employee’s departure and the employee’s replacement.
- the labour hours of the recruitment specialist/manager responsible for sourcing and screening candidates.
- the labour hours of training managers assigned to onboard the new employee.
- the reduced productivity of new hires until onboarding is complete (which as mentioned can take 6 months or more).
But when resources are well spent ensuring an effective onboarding process, employees will tend to extend their work-cycle with the same employer. This will de facto reduce employee turnover rates and associated costs. 58% of employees are more likely to stay for more than 3 years when they experiencing a good Onboarding process, according to SHRM.
Cost of Onboarding a New Employee
The total cost of turnover per employee depends on the level of experience. Replacing highly skilled employee costs up to 400% of their salary.
—Sparkbay, A Step-by-Step Guide To Calculating The Exact Cost of Turnover.
Using a Pre & Onboarding Software Helps Save on the Cost of Onboarding a New Employee
Investing in new employees is a prerequisite for any employer. Regardless of your level of seniority, the company has to account for the cost to onboard a new employee. Even filing paperwork takes resources away from a normal workflow that would have otherwise generated profit to the company.
Notwithstanding, when onboarding is an effective process and resources are well spent with the view of engaging and empowering you to do your best in your new job, the cost of onboarding a new hire will not be outweighed by the financial loss due to high turnover.
A software solution, such as introdus employee onboarding software, can provide the means to achieve this. The introdus platform is easily customisable, and allows for the implementation of a structured and effective Pre & Onboarding programmes. In this way, you will feel engaged with your new workplace as early as signing your new employment contract. This will ensure that the cost of onboarding a new employee is not overshadowed by the cost of lost talent and unfulfilled potential.
Digitising the Onboarding Process is necessary, not for the sake of digitising, but to provide you with a seamless experience. In turn, this assures your employer of a high cost-benefit ratio.
If you want some inspiration for designing an onboarding process, you can find a sample onboarding plan for new employees.