People analytics is one of the hottest topics in HR, and for good reason. Data empowers you to make smart decisions that improve both the employee experience and your company’s performance. One key metric you should be looking at is how much it costs to replace an employee. Often referred to as the Employee Replacement Cost, or ERC, this metric can be a great tool for making a business case for various HR activities. Research shows that only 17% of executives believe HR can demonstrate its value, but by knowing the ERC and using that to demonstrate the impact of HR decisions you’ll position yourself to be a useful, wanted asset in your organization.
How to Measure Employee Replacement Costs
Employee replacement cost is composed of both direct and indirect costs, and covers recruitment, training, and employee productivity (among others). Direct costs are easy to measure and reflect things you pay out. Indirect costs are most frequently associated with opportunity costs, such as work that is not done because the vacancy is still open.
The items listed below are not all inclusive, but should provide you with a base you can start with.
- Direct costs: external recruiters, internal recruiters (hourly, per vacancy), job postings/ads, recruiting software, and screening software.
- Indirect costs: Time/work lost during candidate interviews (hourly).
Training and Onboarding
- Direct costs: training programs and courses, travel costs
- Indirect costs: time/work lost while people help onboard new employees (hourly)
- Direct costs: overtime/extra work from colleagues during vacancy, temporary employees to fill gap
- Indirect costs: missed work during vacancy, time to perform (how long does it take until the new employee is at 100%)
When gathering these numbers, you can even create to separate cost sections – one that only includes actual, billed direct costs, and another that also includes indirect costs.
Below is an example to give you a sense of what this looks like. Keep in mind that costs can vary between companies as well as geographic locations. We recommend using this only as a source for ideas, rather than a blueprint for your own model.
Replacing a Junior Java Developer – Example:
- External Recruiter: €10,000
- Internal Recruiters: €4,000 (80 hours, €50 total employment costs per hour)
- Job posting/ads: €500
- Total software/tool cost per vacancy: €100
- Total interview opportunity costs: €350 (5 hours X €70 total employment costs per hour)
Training and Onboarding Costs:
- Training programs, tools, and online courses: €500
- Meetings, trainings, etc. with managers and teammates: €1400 (20 hours X €70 total employment costs per hour)
- Freelancer: €24,000 (6 weeks X €4000 per week)
- Productivity loss: €30,000 (based on 60% average productivity during first six months)
Total Direct Costs: €39000
Total Direct and Indirect Costs: €70850
How to Use Employee Replacement Costs to Improve HR Operations
Getting the data together is only half the battle. Once you have it you’ll need to use it as part of building a business case. Two areas to focus on regarding ERC are engagement and retention.
A great way to quantify the value of employee engagement is to see if there is a correlation between engagement (found through annual surveys as well as pulse surveys) and turnover. If you can show that increased engagement results in reduced turnover, you can then connect that relationship to the cost of replacing employees. With this data in hand, you can provide concrete numbers that show the benefits that come with engagement programs.
Once you know how much it costs to replace employees you’ll be better aware of how much money you are free to spend to retain them. For instance, if you learn that it costs about €50,000 to replace an employee from a given department, you can know what level of investment is appropriate for retaining them. One possible retention tool could be paying for a training program. This will have the benefit of costing much less than replacing the employee while also helping to improve their performance.
While the exact costs of replacing employees can differ greatly from company to company, working together with your team to know how much it costs will enable you to make smarter decisions about how and where you should invest in your people. Furthermore, it will enable you to make stronger, financially driven business cases to senior management. In the end this will enable you to run your people operations more effectively, have more engaged employees, and a more successful company as a result.