How Much is that Open Position Costing You?

Cost of vacancy (COV) takes into consideration what an open position is costing a company in lost productivity from the time the position is open until it is filled. Cost of Vacancy can be traced back to the Medieval European practice of calculating the cost of keeping a prisoner versus expected future earnings of him. In modern times, Human Resource Accounting (HRA) began using COV to help determine the organizations cost of voluntary or involuntary-turnover, slow recruiting processes or company growth plans.

There has never been an agreed upon standard calculation due to so many different variables associated with calculating the cost such as different position requirements, industry, product or service life-cycle, promotability, persons attitude and in my personal opinion, the organizations ability to fill the role on their own quickly with high caliber talent.

There was a proposed formula to calculate the COV by Lev and Schwartz (1971) whose equation only works when there is quantifiable data available. The formula takes into account; age, present value of future earnings, retirement age, probability of person leaving the organization, expected earnings, and discount rate. [1]

E(Vy) = ∑ Py (t+1) ∑ I (T) /(I+R) t-y

There is a simpler way to determine COV. Divide position salary by 220 working days a year. The total equals average revenue the role produces daily and then can be calculated into lost productivity on a daily, weekly or monthly basis.

Example: Non-Sales Role $150,000 a year salary / 220 = $681.81 a day in lost productivity x 20 workdays a month = $12,636.20 lost productivity a month.

Another simple and more frequently used calculation relies on research conducted by Harvard that many analysts over the years agree on. Take the annual salary and multiply it times a factor or 1-3. Most use a factor of 2. Using the same dollar figure as in the example above;

Annual Salary $150,000 x Factor of 2 = $300,000 / 2080 hours worked a year =$144.23 per hour x 160 hours a month = $23,076.92 per month in lost wages.

My suggestion is to use the two examples above and take the average. This will give you a rough estimate of lost productivity. In this case, a role that pays $150,000 a year is costing the company $17,856.56 a month or $892.28 a day in lost productivity.

No you see how critically important talent acquisition becomes. An additional challenge companies face with regards to the COV is a study done by Deloitte [2] indicating it takes a company human resources department an average of 52 days to fill a role. Using our example above -52 x 892.28 = $46,427 in lost productivity. What is even worse, if HR doesn’t fill the role in this time frame, the report says that it will take them at least 6 months to fill the position, $278,562 thousand dollars in lost productivity. This is in a non-revenue producing role.

[1] http://www.ait.ac.th/news-and-events/2010/ait-in-the-news/jul/methods-and-accounting-treatment-of-hra/#.VzXYrmQrJbU
[2] http://www.bersin.com/blog/post/Benchmarking-Talent-Acquisition-Increasing-Spend2c-Cost-Per-Hire2c-and-Time-to-Fill.aspx