How does the cost of salaries compare to the cost of employee replacement?

For many business owners, the cost of salaries can be a concern. You’re trying to save money, but have a pressure to meet the market rates and keep employees on board.

While you may try to save costs on wages, a lack of competitive salary or salary increase can lead to an employee leaving for a role elsewhere. If not handled carefully, being restrictive on salary can become a vicious circle, where you end up losing employees and actually spend more money on hiring their replacements.

The cost of rehiring isn’t small either – it includes recruitment expenses, onboarding, training, as well as the productivity lost during the transition.

Increasing salaries to meet the market can be daunting, but when comparing it to rehiring costs, you might find it’s an investment worth making. Here’s why…

What is the employee cost per new hire?

In Australia, a report by the Australian HR Institute found that the average cost of hiring a new employee is estimated to range from $10,000 to $25,000, depending on the role and industry. This includes recruitment expenses, onboarding, and training, all of which are added to the employee’s base salary. The onboarding process, which involves everything from orientation to job-specific training, is another significant financial requirement that is not present when retraining and upskilling current employees.

For instance, if a new employee is hired at a market-competitive salary of $80,000, you would have to add that to the overall employee cost. However, the true cost is far higher when recruitment fees, time lost in productivity during the transition, and training are factored in to accompany the salary cost. In contrast, retaining an experienced employee and offering a reasonable salary increase typically incurs fewer overhead costs and avoids the hidden expenses associated with new hires.

The true cost of the basic salary

As mentioned earlier, the concept of a basic salary goes beyond simply meeting the minimum wage; it also involves offering a competitive salary that aligns with industry standards. When companies delay salary increases due to economic uncertainties, such as those seen during the pandemic, employees’ pay can lag behind the market. This is problematic because when the time comes to hire new talent, the company often has to offer a higher salary to attract candidates.

For example, if current employees are earning an annual salary of $65,000 but new hires require $80,000 to remain competitive, even a significant raise for existing employees may not close the gap. This pay disparity can lead to dissatisfaction and reduced morale among long-term employees, as they may feel undervalued despite their experience and contributions.

Ensuring that salary increases keep pace with market demands not only retains talent but also avoids the higher overhead costs associated with frequently replacing employees.

Importantly, when businesses elect to not provide salary raises, and instead face the repercussions of losing talent, they may end up paying more than what they would have been paying for the simple raise - as they will now be netting talent that requires a higher salary as a base income. Íf you’re unsure what these competitive rates may look like, you can leverage salary benchmarking tools to find out how much your competitors are paying.

The cost of performance and productivity

The cost of performance and productivity should be carefully considered when evaluating the financial impact of employee turnover. When an employee leaves, the resulting lost performance and productivity can be far more expensive than simply giving a raise would have been. Your team directly affects what your business can achieve, and when performance and productivity take a knock, the result can be less profitability, a damaged reputation, or serious delays in projects.

By increasing an employee’s base salary or offering enhanced benefits like health insurance, flexibility, or paid leave, companies can avoid the significant disruption and costs associated with rehiring.

The cost of talent sourcing

Talent sourcing is not just about finding the right person for the job; it’s about understanding the hidden costs that come with the process. First, there are the direct expenses, such as advertising the position, paying recruitment agencies, and conducting background checks. These can quickly add up, especially for specialised roles that require niche skill sets.

Then there are the indirect costs, which can be even more significant. The time spent by HR teams and hiring managers on reviewing resumes, conducting interviews, and coordinating the hiring process diverts their attention from other critical tasks, leading to inefficiencies across the organisation.

By investing in a competitive annual salary and statutory benefits for existing employees, companies can reduce turnover, saving on the substantial costs of talent sourcing and the lost performance and productivity that come with it. If you are in the position where you’re already looking to rehire, there are more cost effective methods of recruitment. Using specialised hiring platforms that remove the legwork from your HR managers can mitigate some of the costs. If you’re on the hunt for talent, SmartMatch can cut down your overheads, and streamline the hiring process.

The cost of onboarding and training

The cost of onboarding and training new employees is a considerable expense that often exceeds initial expectations. When a new employee is brought on board, the organisation must invest in a range of activities to ensure they are properly integrated into the company culture and equipped with the necessary skills to perform their job effectively.

These activities include orientation sessions, job-specific training programs, and mentoring from experienced employees. Each of these steps requires time, money, and effort which can strain the business’s resources.

New hires also typically experience a learning curve before reaching full productivity. During this period, they may not perform at the same level as their more experienced colleagues, leading to a temporary decline in overall team productivity. This adjustment period can last for weeks or even months, and the business may face challenges in meeting deadlines, maintaining quality standards, and achieving business goals during this time.

The impact on your team

Another element to consider is the impact rehiring can have on your remaining team, as heavy turnover rates can create a cycle businesses struggle to break free from.

When an employee leaves, their responsibilities are usually redistributed among the remaining team members. This added workload can lead to increased stress, burnout, and frustration, especially if the departing employee held a key role or possessed specialised knowledge. The remaining employees may struggle to keep up with the additional demands, leading to a decline in productivity. Over time, this strain can cause even the most dedicated employees to become disengaged, leading to further turnover.

The departure of a team member can disrupt team dynamics and cohesion as well. Relationships within a team are often built on familiarity, and when a member leaves, it can create a sense of instability and uncertainty among the remaining employees. This disruption can hinder collaboration, communication, and overall effectiveness, as the team adjusts to the absence and integrates new hires. The process of rebuilding these dynamics can take time and may temporarily reduce the team’s ability to perform at its best.

How do employment costs mitigate the risk of rehiring costs?

Employment costs, including competitive annual salaries, health insurance, and statutory benefits, play a crucial role in mitigating the risk of costly rehiring. When a business invests in their employees, such as paying salaries that go beyond the monthly minimum wage, they can retain their talent easier. An employee’s salary is not just a number; it directly affects whether or not they will move away from your company for a salary that better aligns with the market.

By proactively offering raises, businesses can address potential dissatisfaction that might arise from stagnating wages. When employees feel that their compensation aligns with their skills, experience, and the value they bring to the company, they are more likely to stay.

This approach reduces turnover, which is often driven by employees seeking better pay and benefits elsewhere. As mentioned, turnover triggers a chain reaction of expenses: the lost performance and productivity during the vacancy, the costs of talent sourcing, and the extensive onboarding and training required to bring new hires up to speed.

Each of these stages represents a financial burden that far exceeds the cost of retaining an existing employee through a competitive salary and comprehensive benefits. By investing in your current workforce, you can create a more stable and productive work environment.