8 minute read
Posted by Chris Platts on 30 June 2020
Recruitment costs account for 15% of all human resources spending [1].
Costs include money spent to cover everything from recruiter salaries and agency fees, to job board advertising and candidate travel expenses.
As such, it is one of the most basic metrics hiring professionals can track.
However, just 41% of all hiring departments report that they regularly calculate cost per hire [2].
In this article, we delve into:
Cost per hire (CPH) is, quite simply, the average amount of money your company spends to hire a new employee.
It is the economic value placed on the total financial investment an organisation makes to attract and recruit new employees. It’s one of many key recruitment metrics to keep track of and is a reasonable indicator of a company’s overall hiring efficiency.
If you know your CPH, you can work out the return on investment (ROI) for each hire which, in turn, allows you to efficiently and effectively allocate recruitment budgets. Without such insight, you’ll find it hard to establish a concrete budget around which to build an effective recruitment strategy.
Importantly, the purpose of measuring CPH isn’t always about proving how cheaply you can make a hire. The cost of making a hire will rise and fall; it’s contingent on recruiting priorities and the positions you’re looking to fill. Nor should it be used to determine the success or failure of a recruitment process. Rather, it should be used as one of many signals that indicate where improvements can be made and a benchmark for the organisation’s ongoing recruitment activities.
The cost per hire formula goes as follows:
Add up the money you spend on hiring, both the internal costs and external costs, and divide that total by the number of hires you’ve made in a specific time frame – a year, a quarter, or maybe a specific campaign.
That’s your cost per hire formula:
Ok, you’re now wondering; how do I know what my hiring costs are? So let‘s break this formula down:
Internal recruiting costs include all of the in-house resources that are dedicated to talent acquisition. Such as staff, budget, and organisational costs. Typically this will include, but is not limited to:
It’s also worth remembering that internal costs can include resource allocation from one internal team to another – even if the money remains in the company.
External costs include any expenditure on external vendors or individuals over the course of recruiting. These costs include, but are not limited to:
NB – don’t include anything spent on the candidate once they become an employee, e.g. onboarding or training costs.
If you were to include lost productivity costs in your calculations then the average CPH rises to somewhere between 0.5 and 3 times an employee’s starting salary. Scary stuff.
Here, you’re trying out how many people joined your business during a set period. It refers to the total number of internal or external hires, either full or part-time.
There are some blurred lines here. Sometimes, according to circumstance, you’ll need to decide on whether to include or exclude some categories. These might include:
As long as you’re consistent with what you’re including you’ll be able to see trends in your data.
Need help working out your cost per hire? Use our free cost of failed hires calculator.
Now that you know how to calculate CPH, it’s likely you want to have a look to see how you compare with the national and industry average.
The Society for HR Management found that the average amount spent per hire was $4,129. However, the CPH for the average executive was more than three times that: $14,936 [3]. However, this does not consider many costs associated with calculating the true cost of bad hiring.
Please take the following benchmark figures with a degree of caution. They’re useful starting points, but this is data from a great variety of industries. The best CPH benchmark data to compare how your recruitment team is doing is by looking at your own company data or by using our cost of failed hires calculator.
Benchmark data from the Society for Human Resource Management [4]:
Benchmark data from CAP study:
Once you’ve done all the hard work of calculating your CPH you then need to make sure you’re using the metric to improve and optimise your recruitment process.
In order for the recruiting metric to have an impact, make sure you’re implementing the following.
Cost-per-hire is at its most useful when it is measured in conjunction with other key recruitment metrics. You then have a much clearer picture of your whole recruiting funnel.
Measure it in relation to:
Track your CPH from quarter to quarter or year to year to monitor how it fluctuates over time. You’re likely to see certain patterns emerge. Hiring could be smoother and less expensive at certain time periods. You might recognise cost savings from particular improvements you’ve made to the hiring process.
Determine which positions in which departments are the most expensive to fill. You then will be able to determine if the reasons for such are validated because of expensive recruitment costs tied to the position. Or it might present a cost-saving opportunity.
Measuring internal and external costs over time helps hiring teams create and adhere to budgets. It’s very easy to spend where you don’t need to when it’s not being monitored. Using a tool like Geckoboard to create a cool cost per hire dashboard like this one means you can give your colleagues in talent acquisition visibility of how your CPH is tracking in real-time.
Calculating hiring costs isn’t that difficult once companies get into the groove of doing it. Tracking internal and external costs is something you’ll need to get on top of.
It’s important to note that cost is only one piece of the puzzle. It’s useful, but not to be looked at in isolation. Don’t let a high cost-per-hire scare you, it doesn’t indicate that your recruitment processes are ineffective; use it in conjunction with other metrics to make sure your hiring spending is being allocated in the right areas.
ThriveMap helps high volume hiring teams to significantly reduce cost per hire through realistic pre-hire assessments. See how we can help you to reduce your cost per hire with an online demonstration here.
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