Here’s a conversation I’ve had more than a few times with agents from different parts of the country:

Agent: “I’ve hired for this position 3 times this year. Everyone leaves after a few months.”

Me: “What are you paying, and what did they leave for?”

Agent: “I’m paying $14 per hour. They left for $16.”

Me: “Did they produce anything while they were with you?”

Agent: “Nope. Got them trained up and they left.”

Me: “Why not pay $16?”

Agent: “I can’t afford it.”

Almost every small business owner I know is hyper-aware of their obvious costs.

I mean, paying $14 instead of $16 saves $4160 per year, right? You can do a lot with an extra $4K.

But usually, the real doozies are the hidden costs–the “leaky bucket” items. And this is one of those situations. Watch what happens when we look below the hourly-pay numbers.

(As always, plug your numbers in to make it more relevant…)

Let’s Check The Math

First, how much did the 3 employees cost, assuming 9 months of total actual employment during the year?

• $14/hr times 9 months = $14/hr x 2080 hrs x .75 yrs = $21,840.

Second, how much did hiring and recruiting cost?

• hiring and recruiting fees + hiring manager’s time = $1,000 * 3 failed hires = $3,000.

Third, what was the opportunity cost of the time lost to training and mentoring?

• foregone production over 9 months = $45,000.

Fourth, how much value would that fully-trained role have produced if the first person had stayed?

• Foregone net production potential for that role for 9 months = $20,000.

Grand total: $89,940.

Here’s The Bottom Line

So what felt like $14 per hour was really $57.65 per hour.

But many small business owners only care about the $2 difference that they can see? The rest is just the “cost of doing business.”

Fine, but it’s the cost of doing low-value business.

“Matt, I don’t believe your numbers.”

Cool. Cut them in half. Cut them in half again. Doesn’t matter because no matter how you cut it, you end up with what I always refer to as the high cost of cheap labor.

But that’s not the worst of it.

If your effort to grow year over year is going to compound over time, wasting a year now will cost you a fortune at the end of your run. (It’s like waiting to start earning compound interest. You don’t lose year 1. You lose year 30.

And besides, is your staffing goal to minimize cost or to maximize leverage?

My Recommendation

Pay for someone that will produce value. Turn them loose and empower them to do great stuff. Then get back to doing CEO stuff.