In this post, we are going to define cost per hire, teach you how to calculate it and highlight its value as a key recruitment metric.
What is cost per hire?
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.
Why you should measure it?
In total, recruitment costs account for 15% of all human resources spending . 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 with 41% of all hiring departments reporting that they regularly calculate it .
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.
How to calculate cost per hire
The 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.
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:
- In-house talent acquisition salaries
- In-house system costs – hardware and recruiting software
- Salary costs of time spent by hiring managers
- Interview costs (amount of hours multiplied by the hourly salary of interviewer)
- Any training or staff development costs for your recruiting team
- Other fixed costs such as employee bonuses for referrals
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:
- External agency fees (e.g. recruiting agency)
- Job board postings
- Aptitude test providers
- Assessment centres
- Candidate vetting (e.g. drug testing/background checks)
- Employer branding activities (e.g. career fairs)
- Relocation expenses
- Software subscriptions – Applicant Tracking Systems (ATS), candidate relationship management systems (CRM), or candidate screening and pre-employment testing tools
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.
Number of Hires
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:
- External workers (consultants, contractors etc.)
- Internal transfers
- People joining due to a merger or acquisition
- Employees on a third party’s payroll
As long as you’re consistent with what you’re including you’ll be able to see trends in your data.
Industry benchmarks for hiring costs
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 . 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 :
- The average cost-per-hire was $4,129 in 2017, down from $4,425 in 2016 but equal to what it was in 2015
- 15% of all HR-related expenses are due to recruitment costs
- 90% of 1,749 companies used employee referrals to source candidates
- 85% used their company website to source candidates
- 2% used TV advertising to source candidates
- 61% of 1,641 companies used networking to source executive candidates
- 41% used recruiting websites to source executive candidates
- 78% of 1,668 companies don’t use automated pre-screening software to sift resumes
Benchmark data from CAP study:
- 16% of annual salary for high-turnover, low-paying jobs (earning under £30,000 a year). For example, the cost to replace a £10/hour retail employee would be £3,328.
- 20% of annual salary for midrange positions (earning £30,000 to £50,000 a year). For example, the cost to replace a £40k manager would be £8,000.
- Up to 213% of annual salary for highly educated executive positions. For example, the cost to replace a £100k CEO is £213,000.
Tips for leveraging CPH
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.
Evaluate it in conjunction with other metrics
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:
- Source of hire and source quality: how effective are different recruiting sources at bringing in quality candidates?
- Quality of Hire: How does the increase or decrease of this metric affect the quality of prospective new hires?
- Time to Hire: does a shorter time to hire often corresponds to a decrease in CPH?
Track it over time
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.
Calculate CPH for individual departments and positions
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.
Calculate CPH forecast future spending
Measuring internal and external costs over time helps hiring teams create budgets and adhere to them. 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.