It Costs $50k to Hire a Software Engineer
Anyone in tech has probably heard that it’s hard to hire good software engineers; but folks might not realize just how expensive it can be. Simple back-of-the-envelope math shows that it can easily cost $50,000 to recruit someone and bring them up to speed. It’s even more if you need to hire a replacement for someone who’s leaving because you also need to re-build their institutional knowledge.
It’s very expensive to hire good people, but it’s even more expensive when good people leave!
Cost of Hiring an Engineer
A simple equation for the cost of hiring a software engineer looks like:
Cost of hiring = (recruiting) + (engineering time for interviews) + (new hire training) + (bonus, relocation, etc)
- Recruiting is usually the largest of these expenses. Some companies use external recruiters who charge a fee, typically 20–25% of one year’s salary. Other companies hire an in-house recruiting team to source leads and manage the hiring pipeline, so they need to pay those peoples’ salaries. There will be additional costs to access sourcing platforms like LinkedIn. Often companies use both external recruiters and an internal team. Of course, recruiting costs can vary depending on the specific roles, location, and your company’s reputation.
- The next cost is the time your engineering organization spends on phone screens, in-house interviews, attending job fairs, and other hiring tasks.
- Ramping up new employees takes months, and may also require significant time from your existing team for mentorship and training. If you are replacing an engineer with years of institutional knowledge, the total time spent replacing them fully may be enormous.
- Finally, there may be other costs associated with the hiring package — a signing bonus (often $5-10k), relocation (perhaps $10k), etc.
Let’s step through one hypothetical scenario, where we hired Jeanne as a software engineer with a salary of $125,000/year. If we factor in benefits, payroll tax, etc. her total cost is $170,000/year. Her hiring costs were:
- $25,000: we used an external recruiter who charges 20% of one year’s salary.
- $3,000: even though we had an external recruiter who found Jeanne, we also used about two weeks of our internal technical recruiter’s time for that one hire, in terms of the overhead to manage external recruiters, schedule phone screens for all candidates leading up to Jeanne, etc.
- $2,000: the engineering team interviewed three candidates in-house before deciding to hire Jeanne. Each interview took about 7 hours (phone screens, in-house, debrief) for about 20 hours total.
- $20,000: Jeanne will take at least 6 weeks to get up to speed.
The company paid about $30k to recruit Jeanne, then about $20k to train her. Obviously, costs can be much higher (longer ramp-up time, signing bonus, relocation, mentorship, growing team via acquihire) or much lower (referred by a friend, familiar with technology), but I think it’s fair to say that as a rough ballpark the cost of adding a productive engineer is about $50k.
Lesson 1: It only pays to hire the best
Suppose there’s grumbling that our hiring bar is too high and expensive. Instead of a stellar person like Jeanne, we could have hired a pretty decent engineer with only half as many interviews and a 15% recruiter fee.
In that scenario:
- $19k: external recruiter
- $1.5k: internal recruiter
- $1k: engineering interviews
- $20k: training (this might take longer because they’re not as great)
This decent engineer still costs $41k to bring on-board, compared with Jeanne’s $50k. Compromising our quality only saved $9k.
Of course, this is a contrived scenario, but you get the point — given how high software engineering salaries are and the way recruiter fees often work, there’s not much benefit to lowering your bar.
Lesson 2: Encourage referrals
A good employee referral skips the recruiter costs. That’s a huge cost savings and should be encouraged! Most companies offer an employee referral bonus of $3k or $5k, which is still a great deal for the company. Note that you should still expect to rigorously interview referred candidates.
The fact that an employee is willing to refer their friends implies that they like the company well enough to promote it. Track your referral rate as a metric of employee happiness.
Lesson 3: Spend a bit of money on retention
Good people do leave naturally. But because it’s so expensive when they do, it’s worth spending serious effort thinking about places where you could spend a bit of extra money to reduce attrition.
While increasing salaries may seem like the obvious starting place, this can be the most expensive option. As a general observation, people don’t tend to leave because of money per se; they leave because they don’t feel valued and respected. There are small, high-ROI options to make employees feel better about going to work and valued by the company.
For example, suppose a few basic office improvements — standing desks, better lighting, some soundproofing, fresh paint, and a few plants — would reduce attrition by 2%. In team of 100 engineers, that 2% translates to over $100k/year saved. If space improvements cost $20k/year, that’s a 5x ROI. Of course, it’s hard to concretely measure the factors leading to attrition which is why it’s so common for facilities and finance to squeeze budgets to an often ridiculous degree.
Some other low-cost-high-ROI ideas for improving morale and retention include:
- Manager training and coaching (better bosses make employees happier!)
- Employee learning and development (conferences, books, classes)
- Make it easier and faster for employees to file expenses
- Periodically take teams out to lunch
- Host tech events
- Bring in speakers for a brown-bag
- Time for hackathons
- Thoughtful team-celebration events. Too many companies either spend almost nothing to celebrate big wins or just throw money down the drain on boozy parties; it takes serious work to find fun, inclusive events for socializing. These don’t necessarily need to be super-expensive.
Do your own math
The $50k figure is of course a wild estimate — I’ve seen actual numbers that were much higher, and others that were a bit lower. It’s a worthwhile exercise to think about the hiring costs for your company because it gives you some perspective to think about how you’re allocating money and time. Too many organizations don’t want to talk about this number, as if it’s a secret only leadership should know about — but it’s such a crazily big expense that it seems silly to not talk about it. This number should explain why making hiring decisions ought to be taken very seriously; the value of referrals; and why it’s in everyone’s interests to push back against penny-pinching measures.
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