Do You Know the Cost of Replacing an Employee?

The employee will ask for a better raise and the company will refuse (citing bogus reasons) and promising a better one in the next cycle.

The same employee when puts down the paper will be offered the same raise and sometimes better than what he has been offered by the other company. By that time, it’s usually has been quite late, the employee’s mind is made up and the company loses the employee.

If the company is ready to offer the employee the expected raise (or higher) upon his resignation, it could very well mean that the employee was worth the raise he was asking for. Then why do the companies hesitate to offer the employees what they are worth?

One of the major reasons is that most companies do not realize the cost of finding an equal replacement for the employee. Often companies are good at penny-pinching but almost always miss the big picture. 

So what is the Real Cost of replacing an employee?

1. Recruitment Cost: – The cost of having dedicated recruitment professional(s) to find a replacement, sourcing hundreds of resumes, through multiple job portals (running on paid subscriptions). 

2. Interview Efforts:- Finding the right interviewer to take the multiple interviews and shortlist a bunch of candidates. And the interviews also go for multiple rounds in companies. So tens (and in some cases hundreds) of hours of interviews to find that ‘perfect‘ candidate who can be a good replacement. And mind you the interviewers are diverting their productive (and in some cases billable) time to these activities.

3. HR Cost:-  HR is involved in almost all the stages, from the point when the replacement request is received to hiring the candidate.  Some examples of HR costs are as follows:
   1. Time spent to understand the requirement,
   2. Finding the reason why the employee is leaving,
   3. Persuading him with multiple offers,
   4. Time spent in his exit formalities (which in some organizations could be 2 days long),
   5. HR interviews for the new candidate,
   6. Pursuing the new candidate, negotiating with him on the offer and date of joining,
   7. Keeping him engaged till his joining date,
   8. onboarding/orientation time
4.  IT & Infra Cost:- The efforts in disabling accounts, taking backups, and ensuring all the policies have adhered to upon exit. And at the same time arranging new machines, installing software, having the new employee comply with all IT policies, etc., and troubleshooting initial issues that most employees have. Orienting the new employees with organizational IT policies.
5. Knowledge Transfer Period:- The KT period is probably a honeymoon period in most organizations. At this time, no productive work is being done not by one but 2 employees and that could continue anywhere from 1 to 8 weeks. And at the end of the KT period, the new employee is not better off by a whole lot.
6. The Replacement’s Cost:- The replacement usually costs more. Whatever the new candidate’s actual salary, they would have been offered more. In most cases, if it’s an equal skill replacement, the organization will pay more than they were paying the parting employee. In some cases, when early joiners are required, the organizations buy the prospective employee’s notice period or offer them other incentives to join early.

And the clincher is that once the companies have gone through all this pain, invested all these efforts and costs, the replacement might not be as good as the original employee or simply might not work out for multiple reasons. Then what do you do?

Candidates ducking out at the last moment is quite common in the software industry. Then what do you do?

Nothing except turning the wheel again and going through the whole agonizing process again wasting efforts and money further. 

In most cases, if the maths is done right, the cost of replacing an employee would surpass his entire year’s cost and in all cases would definitely surpass the amount of the raise that the employee originally asked for. So, companies why not simply give the employees what they are asking for, or even better compensate them even before they have to ask based on their real worth.