The real cost of maintaining a new software developer
In our previous article https://medium.com/dev-genius/the-real-cost-of-hiring-a-new-software-developer-bdc6bbcd9745, we found out how much you spend on the hiring process. Then if your hiring was successful, you’ve finally got a new developer in your team. Sounds great, but this is not the end of your costs on the developer. Maintaining a new developer requires costs as well and maybe even more than hiring. Let’s find out.
The most obvious cost is the basic salary of a developer. Considering IT as an extremely competitive industry, in order to attract great talent, you need to provide also a solid additional package (medical insurance, benefits, training, and so on).
First of all, direct costs.
- Base salary — according to the report on indeed.com from the 3rd of December 2020 we count the average salary for software engineers in the USA and consider 107 408 USD as a basic salary.
- Benefits — Benefits range from the minor — free coffee — to the major such as gym memberships, life insurance, disability coverage, dental plans, tuition reimbursement, and the list goes on. According to Joe Hadzima, a columnist for the Boston Business Journal and lecturer at MIT’s Sloan School of Management, the salary plus benefits usually totals “in the 1.25 to 1.4 times base salary range.” As we’ve mentioned in our previous article IT industry is highly competitive so we assume that in total about 30% of salary goes on it — in our case, it means an extra 42 963,2 USD annually.
- Vacation and sick leaves — employers guarantee paid leaves such as annual vacations, sick leaves and on average it costs the company about 7,3% of salary (about 7 840,78 USD annually).
- Training — In a report from Statista.com, companies spent an average of over 1 299 USD annually per employee (1,2% from basic salary). And it’s quite an optimistic spend, as there are lots of different training and seminars, summits and other IT events that your software developer might want to attend and that are usually covered by the company. Also, new joiners require some initial training so the new employee can do the work and start producing for the company. Such training is held by managers and it means that they spend their work hours on non-core activities.
- Equipment — you need to provide your new developer with all necessary for work — desk space, computer, software, additional accessories, and devices. Let assume that it will be about 2 500–3 500 USD (2,3–3,2% from basic salary).
- Taxes. Yes, you are required to pay taxes on the wages your employee earns. Some of these taxes are split between the employer and the employee, while others are the sole responsibility of the employer. Thus according to the U.S. Bureau of Labor Statistics for taxes employer spends about 19,1% of basic salary (on our case it’s about 20 514,9 USD annually):
So, on the direct and countable spends goes about 59,9–60,8% (30% for benefits + 7,3% for vacation + 1,2% for training + 2,3–3,2% for equipment + 19,1% for taxes) or 64 337–65 304 USD.
Secondly, indirect costs. And yes, here comes the most interesting part.
- Cost of productivity during the adaptation period — even if you’ve hired a brilliant talent with solid experience and all skills you needed, it will take some time to get him to adapt and start working productively. According to the Studer Group, “A survey of 610 CEOs by Harvard Business School estimates that typical mid-level specialists require 6.2 months to reach their break-even point.”
Bliss breaks down the productivity scale into three periods: during the first month or so, after training is completed, new employees are functioning at about 25% productivity, which means that the cost of lost productivity is 75% of the employee’s salary. The level goes up to 50% productivity for weeks 5 through 12, with a corresponding cost of 50% of employee salary. Weeks 13 -20 usually bring the employee up to a 75% productivity rate, with the cost being 25% of employee salary. Around the five-month mark, then, companies can expect a new hire to reach full productivity.
Let’s do some calculations. 107 408 USD / 52 weeks in year = 2 065 USD/week.
So in money equivalent the lost of costs will be:
(0,75 x 2 065 x 4 first weeks) + (0,5 x 2 065 x 8 weeks) + (0,25 x 2 065 x 8 weeks) = 18 585 USD or 17,3%.
- Unproductive work. Sometimes it happens that the person you’ve chosen is a bad hire. We believe it’s not very often happen but bad hires are a priori unproductive. Either they don’t produce an acceptable amount of code, or worse they produce unusable code that needs to be rewritten by someone else.
- Unproductive use of others’ time. Hiring a new person regardless of successful or bad hire means that the manager/team lead spends a certain amount of time on the assistance of a new joiner. And, of course, bad hires require more time and costs.
So additionally, indirect costs on maintaining a developer hide in themselves at least 17,3% of annual salary extra spends. And totally in the process of maintaining a new developer employer spends about 77,2–78,1% of the annual salary of a new developer.
In conclusion, we just want to show again the importance of understanding all costs you might know and some that you might even not overthink before. This is the second part of the article from the cycle “Real cost of hiring new software developer”. We’ve already talked about hiring costs in the previous article. And today we got an understanding of the maintenance costs. The next, and the last part, will be about the cost of employee turnover. So stay tuned!
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