- May 20, 2013
- Posted by: Paul Foster
- Category: Business growth help, Business team management, Grow a Business, Small business management advice
How do you determine whether it makes financial sense to hire a new employee?
Let’s look at an example:
Cost of investment: The main cost of the new hire will be the monthly wage costs times the number of months it will take the new hire productive. If you pay someone $4,000 a month and it take them 6 months to become productive, the base investment is $24,000. There will be employee benefit costs as well as direct training costs. I would add 20% more to the base investment for estimated training, benefits, uniforms, etc. so the total investment in one employee could be $30,000.
What are the risks?
What if they quit after 5 months? What if you have to fire them after 3 months?
This is a big risk. It seems even bigger if it’s happened to you before. The fear of dealing with a bad hire can stop you from hiring even when you should be.
You can mitigate the hiring risks in a number of ways:
1) Invest sufficient time in the selection process. Involve other employee in the selection process – they will be involved in training and working with the new person – if they helped pick them, they will naturally be more open to working with them.
2) Invest sufficient time and effort in the induction and training process. Make sure the first day is a good first impression. Make sure the team is available to train and mentor the new hire. The owner should make time to welcome the new hire and support their training.
3) Hire for attitude, train for skill. If the new hire is not a good ‘cultural’ fit, I recommend not hiring them.
In summary, hire slow, fire fast.
What is the return on investment?
A good rule of thumb is to make sure an employee can produce 2 to 3 times their base pay. The $4,000 per month employee should produce $10,000 a month in productivity. Your industry may be different, but there needs to be some measurable target of productivity as a goal. If the new employee is an administrative position or indirectly involved in sales or production, you can still look at how much they can increase the sales or production efforts with their support. If your good producers are bogged down by inefficient administration, the return on investment comes from freeing them up to do what they are good at.
Growing into the new employee
It doesn’t always make sense to wait until you are so jammed with work with your existing team to make an investment in a new employee. Making the investment during a slower period and then ‘growing into’ the new employee is more manageable. You can compare this concept to buying inventory for a retail store – you need to buy inventory and put in on the shelves in order to make any sales. Hiring a new employee is similar. You need to hire them and train them before you can look for growth the make them productive. In summary, the hiring decision usually goes like this:
1) Mitigate the risks by hiring for attitude and overcome the fears in order to make the necessary investment in good potential.
2) Make time to train them properly.
3) Grow the business to keep them productive. Making the investment in the new hire will be your motivation to get the growth!
In summary, you can’t wait for the perfect time. There is an investment and risk for hiring new people. When it works though, it becomes the best idea you ever had!