Cost per Hire: Definition, Formula, and Calculation
How much does it really cost to hire a new employee? Cost per hire is one of the most used HR metrics and recruiting KPIs. Understanding cost per hire enables you to make more strategic decisions when investing in your recruitment efforts. In other words, it helps in decision-making around the costs involved in the hiring process and also provides an estimation of the cost of hard-to-fill roles.
There are many costs associated with hiring a new employee to fill a role, with some of the obvious and some of them not so straightforward. For example, how do you quantify the marketing material needed to advertise a vacancy? Or how do you calculate the cost of the interview process? This makes the cost per hire arguably one of the most important, but also the trickiest metrics in recruiting and talent acquisition. Let’s have a look at the cost per hire definition, formula, and how to calculate it.
What is cost per hire?
Cost per hire is a recruiting metric that measures the costs associated with the process of hiring new employees. These include expenses such as sourcing and recruitment advertising costs, onboarding, referral bonus program costs, etc. For example, if you hire 50 people for the year, and you spend an estimated $100,000 on the hiring process annually, that would mean that your cost per hire is $2,000. It’s a great way to measure if your recruitment process is optimized relative to your industry and roles.
Also, it is useful when comparing between departments across the quarter and annually to spot any significant trends.
Multiple factors impact your organization’s cost per hire.
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SHRM developed an industry benchmark that you can review to understand if your cost per hire is at the industry average.
Cost per hire formula
The standard formula for cost per hire formula is:
What exactly do internal and external costs involve? Let’s have a look at some examples. Bear in mind that this is a non-exhaustive list. You can find more information in the Cost-per-Hire Standard document by the American National Standards Institute (ANSI).
|Compliance costs||These are the expenses associated with the monitoring and processing documents to be compliant (e.g., legal documents, procedure documents, etc.)|
|Administrative costs||Expenses associated with the support of the recruitment function, including things such as office equipment, rent, food, hotel expenses, etc. If it is impossible to allocate the exact administrative cost of recruitment, then a percentage of the total admin cost can be used based on the recruitment headcount.|
|Training & Development||Costs of training and upskilling recruitment staff to expand their skills. This might include online courses, like Talent Acquisition certificate program, or offline training.|
|Recruitment/sourcing staff costs||This is the cost of your sourcing/recruitment staff, including their salary, performance bonuses, and benefits.|
|Hiring manager costs||Typically, your hiring manager is responsible for other parts of the company. So, anytime spent away from the desk doing interviews costs the money.|
|Background checks||The costs are associated with ensuring the candidate is fit for hire. This includes criminal and educational checks, references, credit checks, eligibility to work, immigration status, etc.|
|Pre-screening expenses||Costs related to ensuring the candidate meets the initial recruitment criteria (e.g., assessments, tests, automated interviews).|
|Sourcing expenses||Cost of sourcing expenses, purchase of information databases, professional association memberships.|
|Technological expenses||The costs associated with the recruitment technology (including your applicant tracking system, infrastructure to process applications, system maintenance, etc.)|
|Travel expenses||Costs for both candidate and recruiter where travel is required. This includes flights, hotel costs, etc.|
|Marketing costs||Any costs associated with recruitment marketing efforts include social networks, SEO, website updates, and job board posting.|
|Employee referral expenses||If you have an incentive program to encourage employee referrals, then this would be a cost.|
|Signing bonus||A sum of money paid to an employee to join the company.|
|Third-party expenses||This could include, for example, a professional association or an external agency that provides you with sources or candidates.|
|Job fair expenses||Costs associated with organizing a job fair include renting equipment, shipping, design, booth costs, labor & rental expenses.|
Other costs to consider include relocation expenses, drug testing, or campus recruitment expenses.
For both internal and external costs, you need to analyze every part of the recruitment process for your own company to identify all the costs. Some of the costs we’ve talked about may apply, and some may not even be mentioned in the above lists.
Total number of hires
Determining your total number of hires depends on the outcome you aim to achieve when calculating cost per hire. Your number of hires could include both internal and external hires. It could also include temporary staff, freelancers, fixed-term contracts. On the other hand, it could exclude employees transferred as a result of a merger or acquisition or employees that are on a third-party payroll.
Then, the number depends on the period you’re calculating your cost per hire for. You might look at the total number of new hires in a specific quarter, or in a calendar year, for instance.
How do you calculate cost per hire?
To calculate cost per hire, you need to gather all data of your internal and external costs. You also need to determine the period of time you are calculating (monthly, annually, bi-annually, quarterly). You can also calculate the average cost per hire per department or even per role. You can go through four steps to calculate costs per hire, which we will demonstrate with a cost per hire example.
Step #1 – Gather your cost data
The first thing you need to locate is your expenses report for a specified time period. Try to get this from the finance team, and as best as possible, isolate the costs for the recruitment team.
Step #2 – Identify your internal costs
Capture all the internal recruiting costs in a spreadsheet in one column. For example, let’s calculate the internal costs for Exxaro Incorporated, an insurance company.
|Internal costs||Costs in USD|
|Cost of sourcing||2,000|
|Recruitment team costs||4,000|
Step #3 – Identify your external costs
Capture all the external recruiting costs in one column:
|External costs||Costs in USD|
Step #4 – complete the calculation
Let’s say you made five hires in the month of October. If you are using a spreadsheet, your final calculation will look something like this:
|Number of hires||5|
|Cost per hire||4,700|
The formula behind cost per hire is:
= (7,000 + 16,500) / 5
That’s an average cost per hire of $4,700. Is that bad? Is that good? According to the SHRM industry average, that’s slightly above the total average:
|25th Percentile||Median||75th Percentile||Average|
|Cost per hire||$500||$1,633||$4,669||$4,425|
That does not mean it’s expensive – it depends on context. If, for example, you hired five actuarial scientists in October, then operating above the industry average is acceptable and expected. If, for example, you were recruiting for a less specialized job, then perhaps you want to review your process on how to reduce your cost-per-hire.
Why is cost per hire an important metric to track?
Measuring cost per hire helps you optimize your recruiting process.
- Determining recruitment and HR budget – Tracking your cost per hire data helps you understand what financial resources you need to hire in the next period. It helps with forecasting costs for the year and also provides a clear indication of recruitment contribution to the bottom line of the business. As an example, through a number of social media and employee advocacy initiatives, Ericsson was able to reduce their cost per hire by 70%. Not only did this result in a reduction in costs, but the associated efforts resulted in high retention rates. This has a significant positive impact on the HR and recruitment budget, as it means a reduced effort in recruitment and onboarding costs.
- Managing costs – You don’t always need to strive to lower your cost per hire. Surely, some hard-to-fill roles will have a higher cost per hire than other roles. However, you do want to make sure that you’re getting value for your money. As an example, Nokia spotted an opportunity to use Indeed as their preferred search engine for jobs. Applications made through Indeed sent it directly to Nokia’s applicant tracking system. As a result of this strategic decision, Nokia’s cost per hire was reduced by 74 percent compared to the company average (through other platforms).
- Measuring the performance of recruiters – The metric also gives you an indication of how your recruiters are managing their resources. As an example, Nature’s Pride found themselves in a situation where their business was exponentially growing. As the recruitment needs grew as well, the company found that by using external recruitment agencies, they were not growing the strength of their internal recruitment team. Among many strategic decisions, the choice to be fully in control of their own recruitment process allowed them to measure performance and results. This resulted in an approximate drop of $1,100 per hire.
To sum up
Calculating your cost per hire helps you optimize your recruitment budget and recruiting process as a whole. Make sure to keep track of your internal and external expenses to get an accurate overview of costs per hire at your organization. A one-size-fits-all approach does not work when calculating cost per hire, as it is essential to take into consideration many variables, including the role being recruited for, the demand for the talent, and the size of an organization.