A few weeks ago, I wrote in another piece, Onboarding is Unboxing, that I calculated for a client once that it cost them about $350,000 to replace a junior engineer if she left at 12 months. I want to revisit this concept and break it down a bit, and see how it’s related to retention — because it always surprises people when I mention it. Beware, we’re going to go into some math-y stuff in this read.
So how did I get to that number — and why is it important?
It’s important primarily because the turnover rate in the tech industry hovers around 15%, depending on who you ask, and Tech Republic found that average tenure at tech companies, including Google and Amazon, was about 1.2 years. So, if we’re paying an average salary of $98,260 for a junior software engineer and they only stay for 14 months, we’ve put down at least $108,000 just in salary. Add in the cost of aggregated time spent by HR, recruiting, the manager, and the employee’s team, and you can see how the cost balloons. I got to the number I quoted above using this formula:
Salary+Benefits of New Hire + [(Manager Salary/2080) * 3hrs/week * 24 weeks]
[(Avg. Team Member Salary/2080) * 2 hrs/week * 24 weeks * 3 team members]
Unrealized, Indirect Costs
So, in the case above, the salary and benefits totaled $130,000, and the manager time cost totaled $5,192, and the team member cost totaled $9,346. The onboarding cost was about $7,000 (you can see more about that later in this piece). Our total now is $151,538, and we only calculated the manager’s time for onboarding-specific activities at a very conservative estimate. We haven’t added in the unrealized, indirect costs of a manager’s time over the first year, HR costs, administrative costs like rent, software and license costs, backfill costs (a conservative 20% of the salary, so in this case $26,000), and the sunk cost of paying an employee who perhaps was not adding value back into the business. And of course, replacing that employee also means paying another one a similar or even higher salary.
This math shouldn’t scare you away from hiring, nor should it make you paranoid about your current costs of employment. What it should do is illustrate that hiring and retaining your employees does indeed have real consequence, and we’re only talking about the money. We could be talking about culture, workplace toxicity, and a whole lot more!
So while you’re thinking about that expense, think too about what you could be doing — or changing — for free that might have an impact on retention. A TinyPulse report on employee turnover looked at trends from 400 employees from across the US and found a host of factors that play into employee retention, including having a manager who respects your work, a nourishing culture, and colleagues with whom you like to work.
Retention is involves more than just having benefits, or bean bag chairs, or hack days, or even an onboarding program. It involves leveraging those elements successfully to support an employee as a complete person.
Lest I get too off track, let’s go back to onboarding…
In the conversation of employee retention and costs, it’s important to also talk about the money you can save by implementing a few simple processes. Let’s take a look at onboarding programs as one of those systems. Though it’s a classic ‘gotta spend money to make money’ scenario, there is real data that shows investing in onboarding helps retain top talent for longer.
Bersin by Deloitte and HR onboard both agree that the average cost to onboard a new employee is $4,000. I’ve elaborated on that estimate and tried to make it more concrete by analyzing the cost structures for onboarding (upfront and indirect) and the leading and lagging indicators for understanding onboarding effectiveness. First, we’ll take a look at the costs associated with onboarding:
This will get you to the actual cost to onboard the employee. Let’s look at an example, assuming we are onboarding a mid-level engineer:
Total with new hire’s salary included (upfront + indirect): $127,546.50
Total without new hire’s salary included: $7,546.50
This is a bit more expensive than HR Onboard’s estimate, but it falls in line with what I’m personally seeing in the US tech market, at least on the west coast. SHRM reported that Corning Glass Works found that 69% of their employees who went through a structured onboarding program were likely to stay for up to three years. Now, that’s just one company, but I mention several other data points that support this trend in Onboarding is Unboxing.
Remember that average 15% turnover rate? Applied to a company of 100, that means 15 will leave yearly. Assuming you want to backfill those roles, you’re looking at a $1,913,197.50 bill (that is $127,546.50 * 15, using my math from above). It’s obviously an expensive proposition, so in the coming weeks, I’ll be writing about the leading and lagging indicators associated with onboarding and how you can use them to control costs and increase your return on both upfront investment and the indirect time cost of team members.
If you take only one thing away from this long-winded proof of onboarding costs, take the fact that you choose how you want to invest in your company. You can choose how to invest the cost of hiring and onboarding — hopefully with an eye toward retention. Investing in a system that automates as much of the process, or at minimum provides a template to use, will help you stretch your budget.
I’d love to hear from you — have you ever calculated these costs for your own team? What are they? I’d be interested to see if your estimates are drastically different, or if you’ve come up with new ways to spread cost out. Reach me at @kristenmaeve or email@example.com!