Navigating the current economic storm, startup founders have to focus on the key resource for their early-stage startup to survive and grow — the people. The biggest difference, however, between hiring in a healthy economy and hiring now is that there’s no room for mistakes.
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 should adopt a more data-driven approach to hiring.
A good start is to track these three metrics:
Startup founders have to focus on the key resource for their early-stage startup to survive and grow — the people.
Сost 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. It helps a recruitment team test different strategies, as well as spot areas where they can trim costs and optimize hiring.
This metric is used to calculate the total expenses a company incurs to attract, recruit and onboard employees. To calculate 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 specific period.
First, define the period. It can be a month, a quarter, half a year or a year. I track the cost per hire monthly to continually optimize the process.
Second, tally up all expenses. Take into account the internal costs such as salaries and bonuses of recruiters, licenses for corporate email accounts, the cost of applicant tracking system software and LinkedIn Premium, and education courses for new employees.
Also, include the external costs of job ads and referral programs, fees of staffing agencies, as well as background checks and relocation expenses.
Cost per hire ($) = (Internal recruiting costs + External recruiting costs) / Number of hires made
If your company spends $10,000 on recruiting per month and hires four people, the cost per hire is $10,000 / 4 = $2,500.
For an early-stage startup, a reasonable cost per hire is valued between $3,000 and $5,000. A recent study says the average benchmark is $4,700. If the cost is over $6,000, it makes sense to review your strategy.
To identify the stages incurring the highest costs and find ways to cut expenses, it’s essential to assess each recruitment stage. If candidates decline your offer, gather feedback about the reasons for rejection and conduct new research on market salaries — you may be offering too little.
When you don’t hire frequently, outsourcing recruitment may be more cost-effective than handling all operational costs internally. Compare your current recruitment expenses to the pricing plans of recruitment agencies, which usually charge 15%-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 lead a job applicant through the hiring process. Time to hire measures how quickly an organization can nab a new employee from the moment they first interact with a potential hire to the day when the candidate accepts a job offer. A lengthy time to hire can result in higher recruiting costs, negative candidate experience and ultimately lost talent.
Time to hire (days) = Date the candidate accepted the job - Date they applied
In 2022-2023, the increase in job applications due to mass layoffs has added another challenge for recruiters. As a result, they are spending more time processing applications. At F1V, we have observed a significant increase in the number of applications for a midlevel front-end developer position, with an average of 300 responses in the first week of posting compared to 20 before the layoffs.
From my experience, well-skilled candidates who are actively looking for a job are open to opportunities for two-to-four weeks. Thus, a great time-to-hire benchmark is two weeks, while the optimal range is 15–30 days. If the hiring process is too long, the best-fitting candidates may get offers from other companies before you get to review them. If the process takes longer, it may be worth revising.
Employee turnover rate
High turnover levels can lead to a cascade of problems for a business, including increased hiring and onboarding costs, decreased work quality, and loss of clients.
Staff turnover refers to the number of employees who leave a company voluntarily or are terminated due to poor performance. It’s important to track both 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 leavers / Number of employees) * 100
If the employee turnover rate per year is 5% or less, it’s an excellent result. The company is hiring the right people who are satisfied with their onboarding experience, tasks, team and corporate culture.
A turnover rate of up to 10% is acceptable, but if it exceeds 12%–15%, it should raise concerns. High turnover rates can signal problems with recruitment quality and work conditions, potentially leading to a decline in business performance. A study shows replacing an employee can cost a company anywhere from 50% to 200% of the employee’s annual salary.
The remaining employees may become fatigued and dissatisfied. They may be required to constantly mentor and train new hires, which can lead to increased workloads.
To solve this, the company should talk to employees who are leaving and ask them why. If people are leaving because they want more money, review your company’s salaries or try to offer them other benefits like flexible working hours instead.
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. After one such survey, my company started organizing annual parties and launched a “random coffee” bot in Slack to encourage informal communication.
Managers should also have regular 1:1 meetings with employees to talk about the team, their work, benefits and if they’re feeling burned out. A company can also create a chart to figure out which employees they need to keep at all costs and which ones can be replaced if needed.