What is the cost of vacancy?

When is the cost of vacancy used?

Vacancies arise for a wide variety of reasons. Ideally, they arise due to the growth of a company, but they can also be due to:  

• Resignations (ie. due to low
• employee retention), 
• Retirements
• Maternity leave 
• Sick leave (ie. due to burnout)
• Downsizing the company

Regardless of whether a replacement is planned or not many companies do not take into account that an unfilled position also costs money. Therefore, these “vacancy costs” must also be included in the budget. 

What is included when calculating the cost of vacancy?

In order to determine the cost of vacancy, several key data points relating to the vacant position must be taken into account. These are included in the cost-of-vacancy formula:

• Gross annual salary of the position
  
  The basis of the cost of vacancy formula is the gross annual salary that the company provides/would have provided for the vacant position.
  
  
• Potential working days per year
  
  Equally important for determining the cost of vacancy is the number of working days the person would complete within this time. Holiday and sick days are not taken into account.
  
  
• Average vacancy time
  
  In order to be able to calculate what costs the vacancy is likely to cause a company, the vacancy time must first be defined. The average time to fill is used for this purpose.
  
  Many companies use ‘time to hire’ and ‘time to fill’ synonymously, but this does not reflect the full timeframe of the recruitment process.
  
  An accurate result should include every day it takes from the time a vacancy arises to the day a business would expect to successfully fill it.
  
  
• Importance of the position
  
  Last but not least, the importance of the position for the company is included. For this purpose, it is typically assigned a multiplication factor of 1 (necessary but less important), 2 (important) or 3 (essential).
  
  The above are only the core components of the cost of vacancy formula. Depending on the position and the industry, there can be other factors added. For example, the projected turnover of a salesperson that the company would miss out on until the position is filled.

How is the cost of vacancy calculated?

Now that the core components are known, let’s take a look at the cost-of-vacancy formula. 

First, the gross annual salary is calculated down to the potential working days within the year so that it can then be extrapolated to the expected vacancy time. Then it is multiplied by the assigned factor. To put it more briefly:

Cost of Vacancy = Gross Annual Salary: Ø Working Days x Ø Time to Fill x Factor

Let’s look at a small case and calculation example for better comprehension:

Case study

A small business urgently needs a Content Manager who can maintain and expand the website and online shop content in line with SEO. So far, there is no one in the team who has the necessary know-how.

The gross annual salary for the position is €45,000. Since no one in the team could take on this task completely, but the position is vital for the company’s growth, it is given a factor of 3.

For the average filling time, we assume 121 days and use the average value of 250 working days/year.

Calculation example

If we now insert the values from the above case study into the formula, we get the costs that the company would incur if it left the position vacant for 121 days:

Cost of Vacancy – Content Manager = €45,000 : 250 x 3 x 121 = €65,340.

The costs of the unfilled position for this period alone are almost 1.5 times as high as those of the filled position. 

At the same time, the company also loses the income that a competent employee would probably have earned.

Why is knowing the cost of vacancy important?

The cost of vacancy is an important key figure for companies mainly because it is crucial for the maintenance of a company:

• Economic risks
  
  Unfilled positions can have a serious impact on a company’s growth and cause economic distress to companies in the early stages of their existence. However, excessive vacancy costs can also become a problem in larger companies if jobs have to be cut as a result.
  
  
• Impending loss of turnover/income
  
  Every employee in a company generates income through his or her performance.
  
  
• Budget planning for recruiting measures
  
  Some positions, for example in the healthcare or IT sectors, are currently particularly difficult to fill and could drive up vacancy costs considerably.
  
  The cost of vacancy can then also be used to determine the budget for recruiting measures, which can be invested for the purpose of “damage limitation”.

How can companies reduce the Cost of Vacancy

There are a few simple ways to reduce the cost of a vacancy to keep a company competitive:

• Temporary workers
  
  If difficulties arise in finding suitable candidates, it can help to bring a temporary worker with comparable know-how on board until the right person is found. This can at least stabilise the cost of vacancy.
  
  
• Talent sourcing
  
  Another way to shorten the time it takes to fill a vacancy: actively search for candidates yourself. In talent sourcing (or social recruiting), companies approach suitable candidates and contact them. This is a time-consuming process, but it can reduce the time it takes to fill a vacancy.
  
  
• Build a talent pool
  
  Those who maintain contacts with former, good applicants (i.e. build up a talent pool) increase their chances of being able to hire suitable candidates more quickly in the future. Incidentally, this can save not only parts of the vacancy costs but also the budget for recruiting measures.
  
  
• Optimise planning and process execution
  
  The duration of the recruitment process is a direct factor influencing the cost of vacancy. Without careful planning, the time to fill costs can skyrocket. We explain how to prevent too long a time to fill in our blog post on must-do’s in the hiring process.
  
  
• Use the right recruiting tools
  
  Complementing the above, time to fill can be further reduced with the help of a multifunctional ATS such as JOIN.
  
  Not only can companies streamline their recruitment process, but they can attract and hire talent faster. This can also reduce vacancy costs.