Imagine a bustling coffee shop where an employee leaves for a new position, and the manager delays filling the role. Other employees shoulder the workload as best they can, but the wait for orders increases, lines grow longer and customers walk away. If the job remains unfilled, loyal customers will inevitably take their business elsewhere, and tired employees will seek new positions at adequately staffed businesses.
In this scenario, the repercussions of this unfilled position are clear. The manager can see customers walking out and observe employee burnout. For many companies, the consequences are more subtle but no less serious. Whether your organization is a local café, a tech startup or a global medical R&D company, there are costly ramifications to any unfilled position, and the negative costs begin to mount as soon as the role opens. Too often, however, managers and top executives don’t feel an appropriate sense of urgency when it comes to recruiting and hiring to fill those vacant positions.
Formulas to Calculate the Cost of Unfilled Positions
Doing the math helps decision makers throughout an organization envision the real financial costs of vacant positions in any department, from the C-suite to sales positions to logistics. Calculating the cost of open positions is a key recruitment metric with formulas that are fairly straightforward.
In the case of open sales positions, for example, lengthy time-to-hire translates directly into lost revenue. Hudson uses the following formula to determine the net daily cost of a sales role vacancy:
(Annual Sales Quota x 1.24) - (Total Annual Compensation x 1.20) ÷ 365 = Daily Lost Revenue
For example, if an open sales position has a $900,000 annual sales quota and a total annual compensation of approximately $80,000, the company would lose about $2,794 each day the position remained unfilled. Revenue losses add up quickly if there are delays writing the job description, advertising for the position or even approving recruiting for the role. After only two months, the open position would cost $167,640. With such a high figure, the importance of establishing hiring processes that help your company reduce time-to-fill, while maintaining quality of hires, becomes obvious.
For non-revenue generating roles, it’s helpful to determine the company’s average revenue per employee. The following sample formula from CareerBuilder sheds light on how much money a company could expect to lose each day a position remains empty:
(Total Company Annual Revenue) ÷ (Number of Employees) ÷ 365 = Daily Lost Revenue
With these figures, organizations can set acceptable lost revenue maximums and calculate how many days they have to fill open positions.1
Beyond these formulas, many of the costs of unfilled positions are difficult to quantify but just as crucial for executives and hiring managers to understand. Possible repercussions include:
- Damage to company culture from added stress levels for those filling in the gaps, or the possible loss of leadership.
- Erosion of the company's employer brand when discontent rises among existing employees if vacant positions are excessive or ongoing.
- A drop in customer satisfaction and sales when empty positions lead to confusion and miscommunication with customers and suppliers.
- A lull in idea generation or the loss of those ideas to competitors. The longer it takes to fill an open role, the longer it takes for a new hire to begin sharing their creative ideas.2
Knowledge of these often overlooked ripple effects can spur managers to get a jump on hiring. Most companies would also benefit from calculating in advance the daily lost revenue for roles that are mission critical, difficult-to-fill, or within expanding departments that require multiple roles filled at once. With this information, key players are more likely to implement proactive hiring strategies to ensure critical positions don’t lead to revenue and intellectual capital loss, or lost productivity among current employees.
Need assistance finding high-quality candidates faster? Contact Hudson.
1 “The Cost of Unfilled Positions.” CareerBuilder. Web, accessed 6 March 2017
2 Sullivan, John Dr. “Cost of Vacancy Formulas for Recruiting and Retention Managers.” Eremedia. Web, accessed 6 March 2017