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Companies often refer to their employees as their greatest asset, but a single poor hiring decision can turn that asset into a liability. A bad hire—whether due to a mismatch in skills or a misalignment with company values—can ripple through an organization, dragging down productivity and morale, and even tarnishing the company’s reputation.
Studies estimate the cost of a bad hire can reach up to $240,000 when considering lost productivity, recruitment expenses, and training costs. Employee Benefit News found it costs approximately 33% of an employee’s annual salary to replace them if they leave your company. Gallup’s State of the Global Workforce 2024 Report estimated that lost productivity due to disengaged employees reached $9.8 billion, or 9% of the GDP, in 2023.
It’s increasingly clear that finding the right person for the right role and providing effective onboarding is more crucial than ever. But, how do you know what the cost of recruitment is for your company?
Start with the Cost of Vacancy
To start, you can determine what each open role is costing you per day with the Cost of Vacancy metric.
Cost of Vacancy measures the cost to the organization in quantifiable terms of having an open position in terms of lost productivity, lost revenue, unmet goals, and/or delayed projects. In general, to calculate this number, you take the revenue per employee, divide it by working days in a year, and multiply it by the days the vacancy remains open. Working days per year is defined as the number of available work days after deducting vacation time, weekends or unscheduled work time, and holidays.
Let’s take a look at what all of this might look like for a hypothetical company, XYZ CorporationExample:
XYZ Corporation has 100 employees and an annual revenue of $25 million. By dividing the annual revenue by the number of employees you get will get you your Revenue per Employee amount. For our example, the Revenue per Employee is $250,000 ($25 million/100 employees).
XYZ Corporation calculated its working days assuming 104 weekend days, 10 holidays, and 20 vacation days, leaving them with 231 working days. This means the vacancy cost per day is $250,000/231 or $1,082.25/day. For every working day this position is not filled, it costs XYZ Corporation $1,082.25. The average time to fill (not to be confused with average time to hire) a Software Engineering role in the United States is 56 days. This means the cost of this vacancy is $60,606. This is in addition to the cost of recruitment and the Time to Productivity.
Instead of doing the math by hand, SHRM has a calculator you can use.
Once you start to break down the true costs of an open role, especially one coupled with a mismatched hire, you begin to see how important it is to get it right.
What is Time to Productivity?
Even after you fill your open role, there are still costs to be calculated, starting with Time to Productivity.
Time to Productivity is a metric used within the recruiting and HR functions. It is a measure of the time it takes a new hire to reach the expected level of performance and skill in their role. This metric varies quite a bit depending on the complexity of the role and the knowledge, skills, and abilities (KSAs) of the incoming employee. While this term is sometimes used interchangeably with “Time to Proficiency,” there are slight differences in these metrics. Time to Proficiency is the time it takes an employee to master the skills within their role rather than reach an expected level of productivity.
Time to Productivity is a measure of recruitment effectiveness, and onboarding process efficacy, and is beneficial in refining both of those processes. It is also incredibly useful for resource allocation and forecasting needs.
How Can You Measure Time to Productivity?
To measure Time to Productivity, you must establish what would constitute a “fully productive” employee. This could be anything from sales targets to skill mastery. A good starting point would be the expectations used in a performance review for the same role within the company.
At DockYard, we have a variety of roles. Those we hire most frequently tend to fall into the following roles: Product Designers, Client Partners, UX Developers, and Software Engineers. For the purposes of this post, I’ll focus on Software Engineers. You may see the terms “Software Engineer” and “Software Developer” in this post. For our purposes, we will use the terms interchangeably.
Measuring Software Engineer productivity has been analyzed and debated by a number of organizations. McKinsey put out a robust paper on this topic in August 2023 that discusses, among other things, how to measure Engineer/Developer productivity:
- Using multidimensional metrics - Measure productivity at individual, team, and system levels. McKinsey identifies the following tools:
- DORA was created by Google Cloud as a way to measure developer productivity output.
- SPACE is a productivity system created by GitHub and Microsoft. It is a multifaceted system that measures more than output and incorporates well-being and collaboration.
- Avoid simplistic metrics like lines of code or commits, which may be very misleading. Focus on balanced, meaningful metrics that truly impact your business’s productivity. How We Do It
At DockYard, we have implemented a dashboard of roles and the competencies, skills, and behaviors expected of each role. This provides a framework not only for performance management, but for recruitment and career pathing as well.
In a situation where we were trying to measure the time to productivity for a new hire, we would use this tool to develop our threshold for productivity. For example, within DockYard a Software Engineer would exhibit the level of expected productivity when they were able to: “reliably execute on medium to large features, consistently write code that is testable, maintainable, and easily understood by other developers, and exhibits strong debugging skills in their work.”
Once you have identified your success threshold, you would then measure the time between the starting point—typically a new hire’s first day—and the day they exhibit the expected productivity levels. The difference is the Time to Productivity. This Forbes article ballparks the time it takes a software engineer to become fully productive to be 1 - 2 months.
Conclusion
The costs for filling a new role extend well beyond the salary you’re planning to pay your new FTE. Between recruiting costs, time to productivity, and a host of other factors, filling your role with the right person is a financial imperative.
