Types of Human Resource Costs & Cost-effective Strategies

A human resource (HR) expert or department is one of the pillars of a successful business. They’re responsible for certain tasks from recruiting and onboarding to budgeting, training and developing various company HR policies. Essentially, The HR department helps to oversee your employees, overall employee experience and retention. Due to their wide range of services, several types of human resource costs are associated with running a business. However, these HR costs can quickly add up and can impact the overall success of small and medium-sized businesses (SMBs). To help with your budget, consider some common human resource costs and ways to be cost-effective.

Different Types of HR Costs

HR costs can fluctuate, but they tend to fall into one of five distinct categories. The different types of human resource costs discussed here include recruitment, retention, training, employee benefits and administration.

Recruitment

Recruitment is an essential component of HR that helps with the process of finding and attracting qualified candidates. Some examples of associated costs within this category include job postings and advertisements, applicant screening and the interviewing process itself. Some job platforms have a paywall for employers and the price can range from a few hundred to several thousand dollars. Applicant screening can also get costly, depending on their complexity and screening requirements. Finally, the interviewing process itself requires time and effort that takes away from other business initiatives.

Employee Retention and Turnover

Retention costs include all of the expenses incurred to maintain a stable and engaged workforce. When an employee leaves, the cost of replacing them can range anywhere between 50% and 60% of their annual salary, with overall costs ranging anywhere from 90% to 200%.¹ For example, if you have an employee that makes $60,000 per year, it could cost about $30,000 to $45,000 just to replace them and anywhere between $54,000 to $120,000 in overall company losses.

Disengagement is another HR cost that falls into this category. According to Gallup’s State of the Global Workplace report, employees who are not engaged or who are actively disengaged cost the world $8.8 trillion in lost productivity per year.

Training and Onboarding

Another important HR cost involves training and onboarding. This includes both in-house programs to help learn how to navigate the position and external training programs to further professional development. On average, onboarding and training can cost as much as $4,100 per new hire. While this can fluctuate based on industry, it’s an area to probably consider to invest. Onboarding can make or break your employee's time with the company, so it can be worth the investment in the long run.

Employee Benefits

SMB owners understand the importance of offering benefits. However, there is a cost to employee benefits. On average, SMB employers contribute $1,978 to $3,956 for single coverage and $5,616 to $11,232 for family coverage per employee per year. This can vary based on the coverage options and policy details. On top of health insurance costs, employers also need to consider retirement costs and non-traditional benefits.

Administration

Then there are administrative HR costs that cannot be forgotten. This can include the money you pay to your HR experts or in-house HR team, the HR technology and software you need and any associated costs that have to deal with supporting HR tasks and operations.

Ways to be Cost-effective

While it’s not possible to completely eliminate HR costs within a business, there are some things you can do to be cost effective. Remember to be strategic and think about the long-term effects of your decisions. For example, reducing salaries—especially in times of inflation and economic uncertainty—may harm employee retention, and may further increase human resource costs in the long run. Instead, consider the following cost-effective tips on HR-related expenses.

Get Creative

Innovation and creativity can be powerful tools for HR costs. By thinking outside the box, you can find unique approaches to traditional practices that help you with overhead costs. For example, instead of relying solely on expensive job advertisements, consider leveraging online platforms, social media and professional networks. On LinkedIn alone, approximately 40 million people search for jobs every week. While you might need to pay for a premium account, it can still help with recruitment costs while reaching a broader audience.

Other creative options with HR costs may include offering flexible work arrangements, such as remote work or compressed work weeks. In doing so, this may help with overhead costs associated with in-person support.

Boost Company Culture

Another helpful way with HR costs, especially in regard to retention and turnover, is to focus on maximizing your company culture. Although it may not seem like your number one priority, employees would have to disagree. In fact, when asked, 77% of job seekers from the U.S., UK, France, and Germany said that they would consider a company’s culture before applying for a job, while 79% would consider the company’s mission.⁶

To boost company culture, focus on fostering a sense of employee purpose and alignment with the company's mission and values. Encourage open communication and transparency, allowing employees to voice their opinions and ideas. This creates a positive work environment where employees feel valued, leading to higher retention rates which can be less time spent on recruitment. You should also provide plenty of opportunities for internal career growth and professional development. Mentor programs, training initiatives, employee recognition and loyalty to dedicated employees can also do wonders for your overall company culture.

Reduce Inefficiencies

Next, make sure you’re doing everything possible to help mitigate risks associated with HR compliance issues. This may include establishing robust HR policies and procedures that aligns with HR rules and requirements. Over time, this can help you in case of HR issues and noncompliance.

Consider reviewing and updating your employee handbook and policies periodically to make sure everything is up to date with industry best practices and current HR rules and requirements. Also, hiring the right candidate will help add employees who align with your values. You should consider doing due diligence on your candidates during the hiring process including interviews and verifications because it’s an important way to potentially learn more about your top candidates and find out if they have any serious red flags.

Finally, be proactive about employee performance, but try to avoid criticism without any constructive feedback. This can help you identify areas of improvement and provide solutions to help employees overcome challenges, thus helps with employee engagement or turnover.

Revisit Benefits

Next, try to review your employee benefits package to see where changes can be made. Unfortunately, as an SMB, it can be difficult to achieve competitive pricing without additional help. A great way to maximize your access to benefit plans is to consider working with a professional employer organization (PEO). A PEO can leverage the collective strength of several SMBs in order to achieve big company benefits and can be cost effective.

Outsource HR Experts

Finally, outsourcing HR functions can be extremely cost-effective for SMBs. In doing so, it can help with administrative costs, compliance and create better long-term HR initiatives that help grow your business.

Engaging the services of HR consultants or firms can provide you with HR experts with specialized knowledge and HR expertise on specific HR projects or initiatives without the need for a full-time HR staff. For example, if your business is restructuring, working with an HR consultant can help you with certain HR tasks while being cost effective.

Enjoy cost-effective HR solutions, work with IceHrm today. Our human capital consulting solutions can help you with your toughest HR needs while you work on growing your business. Through HR expert guidance, risk mitigation strategies and headache-free payroll processing, you’ll gain an HR team committed to your growth and peace of mind. Contact IceHrm today to learn more about how we can help you strengthen your strategic HR plans and support your growth.