How to Perform a Cost-benefit Analysis of Hiring

Building a team of driven and productive employees is essential to every company’s success. But hiring new employees requires significant investment in terms of time, money, and resources. From advertising a job role to onboarding a new hire, the recruitment process is capital-intensive.

The costs associated with new hires make it difficult for HR managers to present a business case to senior management. It can be even more difficult during periods of economic uncertainty. Nevertheless, putting a freeze on hiring can also be catastrophic for a business.

How do you decide whether to recruit new employees for a particular role? An effective solution is to perform a cost-benefit analysis (CBA) of hiring. It can help inform key recruitment decisions, such as what role you should recruit for and what type of employment you should consider.

In this blog, we’ll delve deeper into the process of conducting a cost-benefit analysis of hiring. Let’s dive right in.

Cost-Benefit Analysis: A Quick Overview

Cost-Benefit Analysis

Simply put, a cost-benefit analysis weighs the benefits of making a particular decision against the costs associated with it. It helps business leaders and managers determine the best course of action. It comes in handy for various business functions, including project management, product development, financial planning, and hiring.

In the context of recruitment, a CBA compares the projected return from a new hire against the total cost of recruiting them. However, the role of a CBA isn’t restricted to helping you determine whether you should recruit for a particular position. It can be instrumental in convincing senior leadership about the value of a new hire. And it’ll help you allocate a realistic recruitment budget.

Additionally, a CBA will help you evaluate different options and determine the opportunity cost associated with a specific decision. For instance, you can perform a CBA to decide whether to hire a full-time employee or start a new apprenticeship program.

Types of Cost-Benefit Analyses

Depending on your hiring requirements, you can choose from the following types of cost-benefit analysis:

  • Payback period – The time it takes to recover the initial investment in a new recruit.
  • Net present value (NPV) – The difference between the present value of cash inflows and outflows over a given period.
  • Rate of return (RoR) – The net gain or loss of an investment over a specific period, calculated as a percentage of the initial investment.

Costs and Benefits to Consider

While the definition of a cost-benefit analysis seems straightforward, calculating the costs and benefits associated with recruitment isn’t as simple. You’ll have to consider various direct, indirect, tangible, and intangible costs and benefits of hiring a new employee.

When it comes to costs, the first thing you’ll likely do is calculate average salary expenses of the team or department you want to recruit for. It’ll give you an insight into the compensation you’ll have to provide the new hire. Besides base salaries, make sure you consider other factors, such as health insurance, housing allowance, and pension.

Other costs you should take into account include:

  • Advertising fees (to promote the job listing)
  • Training and onboarding expenses (including the indirect cost of lost production hours during training)
  • Overhead costs (such as app subscriptions, equipment, office supplies, and utility bills)

Additionally, you’ll have to factor in unexpected costs, such as loss of revenue due to a new hire falling prey to a phishing attack.

Once you’ve determined the costs of hiring, it’s time to quantify the benefits. The process is even more challenging, given that recruiting a new employee brings several intangible benefits. The most common benefits hiring managers consider include:

  • Increased revenue due to improved productivity
  • Increased share price
  • Improved employee morale and company culture
  • Reduced customer complaints and churn
  • Improved growth prospects
  • Enhanced employer brand

Benefits like an increase in revenue and company share price are easily quantifiable. However, measuring a new hire’s impact on your employer brand or overall company culture may not be as simple. In such cases, it’s a good idea to conduct employee satisfaction and happiness surveys and sit down with key stakeholders in the company to assign a monetary value to intangible benefits.

Steps to Conduct a Cost-Benefit Analysis of Hiring

Steps to Conduct a Cost-Benefit Analysis of Hiring

The cost-benefit analysis doesn’t come with a one-size-fits-all formula. It’s up to you to decide the best approach to identifying relevant expenses and benefits and assigning quantifiable values to each.

If you’re looking to perform a CBA of hiring, here’s a glimpse of the steps you should follow:

  • Determine the company objectives you want to achieve by hiring a new employee
  • Audit your team’s existing workload to identify gaps and opportunities for hiring
  • Define the role for which you want to recruit
  • Assign a monetary value to each direct and indirect cost and benefit of bringing a new recruit on board
  • Compare the costs and benefits to determine the best course of action
  • Consider alternative options and calculate the opportunity cost of going forward with a particular decision

That’s it. You’re now ready to build a business case for your hiring requirements and present it to senior management.

Final Thoughts

A cost-benefit analysis of hiring helps companies build a robust, productive team while considering the financial and operational aspects of recruitment. It helps define your recruitment budget, allocate resources effectively, and determine a potential hire’s impact on the company’s bottom line.

Ultimately, a well-executed CBA will help you build a clear picture of what you’re looking for in a new recruit. That, in turn, will optimize your hiring process and ensure you’re better prepared to find the right talent.

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