Employees are vital to an organization and when job vacancies occur, it is in the best interest for the company to rehire as quickly as possible in order to avoid a disruption in team cohesiveness and the adverse financial impact on profitability and shareholder wealth. Open positions are a cost detriment when not filled in a timely manner and to measure the lost economic opportunity, the following methodologies can be utilized:
Multiple of Compensation Method
The Multiple of Compensation Method values an employee based on their annual salary and is what the insurance industry utilizes to underwrite “key man” insurance policies. In this method, a multiple between 3-7 times is typically applied to the annual salary of the individual. The multiple applied depends on the type of business, the estimated difficulty in finding a qualified replacement and the responsibilities the job position entails.
For example, XYZ Corp. has a Senior Manager position vacant with a yearly salary of $115,000, which has been open for 1 month due to the inability of the human resource department to find qualified talent and/or the inability of hiring managers to take time to view resumes due to increased job responsibilities resulting from the departure of the employee. In determining the economic opportunity associated with this position, a conservative multiple of 5 times is utilized. Accordingly, multiplying the yearly salary of $115,000 times 5 yields the economic opportunity to the corporation of $575,000.
It is highly important that the company fills the job vacancy as quickly and as efficiently as possible. If the above position has been left open for 1 month, the economic value lost to the organization equals $47,917. This is computed by dividing the value of $575,000 by 12 months. On an hourly basis, the economic value lost equals $276.44 per hour and is computed by dividing the value of $575,000 by 2,080 hours (40 hours per week times 52 weeks in a year). This is a lot of money for any organization to be losing by not filling the vacant position!!!
The Revenue Method values the lost opportunity based on the company’s total revenue and total number of employees. For example, XYZ Corp. generated $397 million in 2017 and employed 1,147 employees. Based on the above, the yearly revenue attributable to each employee is $346,120. While the value can be increased by fewer employees this can be detrimental as added workloads to existing staff can cause friction within the organization due to increased workloads and longer work hours, which would ultimately impact the corporate culture in a negative light.
In this scenario, assuming that the person who held the Senior Manager position at XYZ Corp. left for unbeknownst reasons and the position has been left open for 1 month, the economic value lost to the organization would equal $28,843. This is computed by dividing the value of $346,120 by 12 months. On an hourly basis, the economic value lost equals $166.40 per hour and is computed by dividing the value of $346,120 by 2,080 hours. This is a lot of money for XYZ Corp. to be hemorrhaging by having the position go unfilled!!!
What is the Best Method to Utilize
Both methods effectively value the lost economic opportunity of unfilled job positions. However, to smooth out any fluctuations, an average value should be utilized. In the above scenarios, the lost economic opportunity associated with the Multiple of Compensation Method and the Revenue Method on a monthly basis equals $47,917 and $28,843, respectively, with an average equal to $38,380. Accordingly, it is in the best interest of XYZ Corp. to find a replacement as quickly as possible.
For good business practice, businesses must implement a loss limit by determining how much lost economic opportunity would be acceptable by having the vacant position. For example, management at XYZ Corp. believes an acceptable loss limit would be $50,000 for the vacant Senior Manager position. Based on the above, the company would have 28 days to hire a replacement before additional losses would be incurred. This figure is calculated based on four steps:
*Step 1: Annualize the average monthly economic loss. In this case, multiplying $38,380 by 12 months yields a yearly loss of $460,560.
*Step 2: Determine hourly loss. In this case, dividing $460,560 by 2,080 work hours in a year yields an hourly loss of $221.42 per hour.
*Step 3: Determine daily loss. In this case, multiplying $221.42 per hour by 8 hours in a work day yields a daily loss of $1,771.38.
*Step 4: Determine days to hire. In this case, divide the acceptable revenue loss of $50,000 by $1,771.38.
Job vacancies, particularly those that have been posted for a lengthy period of time, represent a major problem from both a financial and corporate culture standpoint. This is significant given that industry conditions are constantly changing and businesses need talent in order to effectively compete. If the recruiting process is slow, it is imperative that management take the appropriate corrective action to avoid any wasted economic opportunity.
While the majority of companies in operation have an internal recruiting department to hire personnel, it is in their best interest that they also work with a specialized outside recruiter to find the best available talent. By aligning with an outside recruiter with a focus on a specific area, the pool of qualified candidates is increased allowing the hiring manager to select the most qualified and talented among the group.
If your organization is looking to hire folks with backgrounds in Training (instructional design, elearning, blended learning, etc), Communication (tech writing, corporate communications, copy editing, etc.) and User Experience Design look to a specialized firm such as UserEdge Technical Personnel to compliment your firm’s human resource team.