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Five Costly Recruiting Sins: Calculating the Cost of Vacancies

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By Loren Miner, Chief Operating Officer
With Tom Brennan, Senior Writer

Part 1:  That job vacancy?  It’s gonna cost you

Every company deals with turnover, but the most effective companies deal with it quickly. Failure to do so can cost your company in dollars and in other ways. At Decision Toolbox (DT) we have identified the five most costly mistakes companies make regarding vacancies, and by sharing them over the next few posts I hope to help you avoid them.

As you strategize about how to respond to a vacancy, you’ll need some realistic figures around the cost of various options (promoting internally, engaging a recruiting firm, bringing in a contractor, etc.). You should consider both direct and indirect costs. Direct costs include recruiting, separation pay, and formal training for a new employee. Indirect costs might include on-the-job training, loss of efficiency, and loss of productivity.

Keep calm and calculate

There are plenty of ways to calculate the hard costs of having a vacant position. You can get pretty complex and use a formula like the one proposed by Lev and Schwartz (1971):

calculating the cost of vacancies

Don’t worry — we won’t. As a CPA I like being called “calculating,” but this equation is way more complicated than you need. You can look into different methods — the Cost Approach, Replacement Cost Approach, Opportunity Cost, and others — and decide which is right for you.

But to make the point, let’s use a simple salary multiplier to calculate the daily revenue loss incurred by an open position with a salary of $70K. Most industry analysts agree that an employee generates revenue at a rate of one to three times his or her salary. For our example, we’ll use two as a multiplier. Assuming there are 220 working days in a year, we divide the salary by the working days, or 70,000 divided by 220, and get $318. Now apply the multiplier: 2 x 318 means that empty seat is costing the company $636 a day, or $3180 per five-day week. In accounting we call that “bleeding.” For technical positions the rate can be even higher. With revenue-generating roles like Sales, bleeding becomes hemorrhaging.

Show me the non-money!

As if that weren’t enough, there are non-monetary costs, too. For example, the work still needs to get done, and if a vacancy drags on too long, you can burn out the employees who are shouldering the extra weight. You might even lose another employee, doubling your vacancy costs. In addition, a vacancy appearing on the job boards month after month starts to look stale. Job seekers think, “Wow, that job must be horrible — no one wants it.” Your employment brand is at stake here.

Costly Sin #1: Putting off backfilling

However you choose to calculate, you can minimize all these impacts by avoiding the Costly Sins. The first one, and probably the most devastating of all, is deciding not to backfill. This may sound good on paper: let’s say your Lead Programmer resigns. Why not distribute her responsibilities among the three Programmers she used to lead? You’ll save that $90K salary (plus benefits), and the three Programmers have been with you three years. No downside, right?

Wrong. There may be times when it makes sense to reorganize in the wake of a resignation, but often it’s a mistake. I already mentioned the risk of burning out the three remaining Programmers. This can result in serious productivity loss, particularly in terms of time.

In addition, separating position accountabilities may dilute quality and performance. Accountabilities aren’t Lego® bricks that can connect to just any other brick — there may be an intangible synergy when one individual owns a particular set of accountabilities. Further, the team’s vision of the big picture may become myopic.

And last but not least, if you put off backfilling the position for too long, you may risk the budget for the position closing up on you completely.

Check back for the next posts in this series, where we’ll explore four more Costly Sins.

Connect with Loren on LinkedIn.

To learn more about Decision Toolbox, contact us – we’d love to hear from you!

 

References

Lev, B. and Schwartz, A. (1971). On the use of the economic concept of human capital in financial statements. The Accounting Review. Vol. 49, pp. 103-12.

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