Navigating the current economic storm, startup founders have to focus on the key resource for their early-stage startup to survive and grow: people. However, the biggest difference between hiring in a healthy economy and hiring now is that there is no room for error.
According to Harvard Business Review, the price of a bad hire is 30-50% of their salary, which can hit startup budgets hard in 2023. To make fewer mistakes, founders need to take a more data-driven approach to hiring .
A good start could be tracking these metrics:
Cost per hire
Cost per hire is one of the most essential business metrics, which must be included in a company's profit and loss report. Help a recruiting team test different strategies as well as spot areas where they can cut costs and optimize hiring.
This metric is used to calculate the total expenses a company incurs to attract, hire, and onboard employees. To calculate the cost per hire, you would add up all the direct and indirect costs of the hiring process and divide it by the number of hires made within a specified period.
First, the period is defined. It can be a month, a quarter, half a year or a year. Monthly tracking of the cost per hire is necessary to continuously optimize the process.
Second, count all the expenses. There are internal costs to consider, such as recruiter salaries and bonuses, licenses for corporate email accounts, the cost of applicant tracking system software and LinkedIn Premium, and education courses for new employees.
In addition, external costs for job advertisements and referral programs, employment agency fees, as well as background checks and relocation expenses are included.
Cost per hire = (Internal recruitment costs + External recruitment costs) / Number of hires made
If the company spends $10,000 recruiting per month and hires four people, the cost per hire is $10 / 000 = $4.
For an early stage startup, a reasonable cost per hire is valued at between $3,000 and $5,000. A recent study says the average benchmark is $4,700. If the cost exceeds $6,000, it makes sense to revise the strategy.
To identify the stages that incur the highest costs and find ways to reduce expenses, it is essential to evaluate each recruiting stage. If candidates reject the offer, feedback is collected on the reasons for rejection and a new investigation is conducted on market wages; it is possible that too little is being offered.
When you don't hire frequently, outsourcing recruiting can be more cost-effective than handling all operating costs in-house. It is interesting to compare current recruitment costs with the pricing plans of recruitment agencies, which typically charge between 15% and 35% of a new hire's annual salary.
Time to hire
For early-stage startups, it's crucial to understand how many days it takes to guide a job seeker through the hiring process. Time to hire measures how quickly an organization can hire a new employee from the time they first interact with a potential hire to the day the candidate accepts a job offer. A long time to hire can result in higher recruiting costs, negative candidate experience, and ultimately lost talent.
Time to Hire (days) = Date Candidate Accepted Job – Date Applied
In 2022-2023, the increase in job applications due to mass layoffs has added another challenge for recruiters. As a result, they spend more time processing requests. There has been a significant increase in the number of applications for a mid-level front-end developer position, with an average of 300 responses in the first week of posting compared to 20 before the layoffs.
From experience, well-qualified candidates who are actively seeking work are open to two to four week opportunities. Therefore, an excellent time-to-hire benchmark is two weeks, while the optimal range is 15-30 days. If the hiring process is too long, the most suitable candidates may receive offers from other companies before you review them. If the process takes longer, it may be worth reviewing.
Employee turnover rate
High levels of turnover can create a cascade of problems for a business, including increased hiring and onboarding costs, decreased quality of work, and lost clients.
Employee turnover refers to the number of employees who leave a company voluntarily or are fired due to poor performance. It is important to track voluntary and involuntary turnover, as well as retirements, resignations, and layoffs, both together and separately, to gain a clear understanding of the overall turnover rate.
Staff turnover (%) = (Number of terminations / Number of employees) * 100
If the employee turnover rate per year is 5% or less, that's an excellent result. The company is hiring the right people who are satisfied with their onboarding experience, assignments, team, and corporate culture.
A turnover rate of up to 10% is acceptable, but if it goes above 12-15% it should raise concerns. High turnover rates can indicate problems with the quality of recruitment and working conditions, which could lead to decreased business performance. A study shows that replacing an employee can cost a company between 50% and 200% of the employee's annual salary.
The remaining employees may feel tired and dissatisfied. They may be required to constantly mentor and train new employees, which can lead to increased workload.
To fix this, the company needs to talk to the employees who are leaving and ask them why. If people are leaving because they want more money, look at your company's wages or try offering them other benefits, like flexible work hours.
You can use surveys for employees to provide anonymous feedback. They may feel unhappy due to negative team dynamics, overwhelming workload, or lack of social interaction with colleagues. Good practices after one of those surveys, are, for example, organizing annual parties, launching a “random coffee” bot on Slack to encourage informal communication.
Managers should also have regular one-on-one meetings with employees to talk about the team, their job, the benefits, and if they feel burned out. A company can also create a chart to determine which employees they should keep at all costs and which ones can be replaced if necessary.
