The Painful Cost Of Vacancies, And How To Calculate Yours

Knowledge Based Article

The economic cost of vacant positions in a company is the opportunity cost of unfilled positions. It is the difference between benefits and payroll savings, less hard and soft costs — for example, loss of revenue, productivity, and employee morale — from not having that employee. This is one metric recruiters use to help them prioritise hiring.

The cost of a vacancy (COV) can vary depending on the position, industry and the current phase of the company’s development. There is no standardised formula for calculating COV, but one possible way is to estimate the average employee revenue, multiply it by a predetermined multiplier based on the role’s impact, and then multiply this by the number of days the position remains unfilled.

For example, if a company has an annual income of £20 million and 50 employees, the average employee revenue is £400,000. If a high-impact position such as a software developer has a multiplier of 2, and the position remains vacant for 73 days, the COV would be:

£400,000 x 2 x 73 / 365 = £160,274

This means that during the period that the vacancy has remained unfilled, company has lost £160,274 in revenue. Of course, this does not include other costs such as overtime pay, hiring costs, training costs, or reduced quality or customer satisfaction.

The amount of money that each employee generates above their salary.

This can be calculated by taking the total cost of the department or company’s payroll for one year and dividing it by the total number of employees. Another way of considering this is by dividing the company’s annual income by the total number of employees.

The industry and the current stage in the company’s development.

For example, in industries where time to market is a key factor that drives corporate success, such as the technology or biotechnology markets, the multiplier may be higher than in industries where time to market is less critical, such as manufacturing or retail.

The multiplier effect of spending and saving within an economy.

This is the relationship between increased revenues and additional cashflow, such as new income streams and expenditure. The multiplier effect arises because one agent’s spending is another agent’s income. When a spending project creates new jobs for example, this creates extra injections of income and demand into a company’s cashflow.

For example, a high-impact position such as a software developer or a salesperson may have a higher multiplier than a low-impact position such as a junior-level coordinator or an administrative assistant.

Here are some examples of positions that if left unfilled have the greatest cost to your organisation:

• Software Developers – That create or maintain the products or services that generate revenue for the company.

• Sales People – Who directly influence the amount of income the company earns by selling its products and services.

• Product Developers – Who design and innovate new products or services that can increase the market share and competitive advantage of the company.

• Leadership and Executive Roles – Who set the vision, design and direction of the company and manage its resources and performance.

Knowledge Based Article