Cost Per Hire and How to Calculate it

Sudhanshu Ahuja

January 21, 2020

Organizations are continually trying to enhance their processes to achieve higher efficiency and productivity. With advanced analytics at their disposal, organizations are increasingly making use of metrics and key performance indicators for this effect. Apart from being objective about the processes, these metrics can also help in making informed decisions. One of the most crucial areas where such analytics can make a huge difference in recruitment. While it is one of the most significant elements of an organization’s success, recruitment is also one of the costliest ones. Cost per hire is valuable in evaluating the efficiency of hiring at an organization. It helps organizations with a bird’s eye view of the well-being of their recruitment function.

Hiring a new employee involves several direct as well as indirect costs. For instance, work hours, advertisement costs, and candidate travel expenses are a few direct costs. On the other hand, are expenses like work hours lost in interviewing or onboarding the candidates that comprise the indirect expenses. Keeping a tab on cost per hire can allow organizations to spend their money in the right places.

As per a survey by SHRM, recruitment accounts for 15% of all HR expenses. Cost per hire becomes all the more relevant in light of such high costs that are attributed to hiring new employees. Apart from being easy to track, the metric also helps in understanding the ROI of recruitment efforts.

  • What is the cost per hire?

    In simple terms, cost per hire is the average amount that an organization spends on hiring a new employee. Earlier, organizations followed different formulae and processes to calculate this metric. However, SHRM proposed a standard formula in 2012 in association with the American National Standards Institute to calculate cost per hire.

    cost per hire

    Here is a breakdown of what constitutes internal and external recruiting costs.

  • Internal Costs of Recruiting

    As the name suggests, the internal costs of recruiting refer to the in-house expenses incurred by an organization for hiring new employees. It is a sum of the resources and efforts that a hiring department spends on recruitment.

    It may include the following:

    • Salaries of the permanent and contractual recruitment team members.
    • Learning and development costs of the hiring team.
    • Incentives for referrals.
    • Total work hours spent by the hiring managers in recruitment. For instance, if the hiring managers spend 15% of their time in hiring, you may include 15% of their salaries for this calculation.
  • External Costs of Recruiting

    An organization may liaise with various vendors for efficient and productive hiring. The external cost of recruitment includes the expenses that an organization incurs to work with these vendors. Here are a few examples of such external costs.

    • The expenses incurred for working with recruitment consultants who support in fulfilling the organization’s hiring mandates.
    • Hiring may become an arduous task without software like Applicant Tracking System and Candidate Relationship Management System. You may add the price of software and the amount you spend on their maintenance to the external costs. Chatbots are the latest AI-powered tools that are helping companies reach their hiring goals. For instance, chatbots offered by Impress can fast-track the applicant screening process and also identify the most qualified candidates..
    • Expenses incurred on candidate background and health checks.
    • Occasionally, organizations have to spend extra time and resources to lure the candidates. While one candidate may be looking for relocation expenses, another may want a signing bonus. All such expenses come under this header.
    • Travel costs for hiring managers and candidates are also included in external costs.

    At times, candidates need some training to excel in their respective roles. Campus-hire training program is an example of this. However, such training costs are not added to the recruitment costs.

  • How much should be the cost per hire?

    Well, there is no standard or ideal response to this. The cost of hire may vary depending upon your location, job role, leadership level, and the hiring source. Or else, it could be specific to your organizational products and services.

    However, as per a survey by SHRM, the average cost of hire is somewhere around $4,425. The amount can go up in case of hiring for leadership positions. Firstly, they are harder to find and convince. Secondly, they may have to meet multiple people for organizational buy-in. Thus, a company must not strive for a lower cost per hire. Instead, the aim should be to arrive at a cost per hire that can give you the best recruitment results. For instance, it may make more sense to opt for an expensive vendor that facilitates the most qualified candidate with a faster turnaround time. Although the initial expenses may seem more, the long-term returns will be much higher in such cases.

  • Why is it important to calculate the cost per hire?

    As seen above, the intention to calculate the cost per hire is not to reduce it. However, it is a metric that finds its use in calculating the recruitment budget. It can help in workforce planning at the start of a year. It is particularly handy in the scenario when the business is expecting a slowdown. The company can work out the hiring numbers, and not strain the overall financials.

    Moreover, you can also follow a few best practices and use cost per hire to improve your processes and boost your strategic planning.

    • Always include the same set of variables while calculating the cost per hire. This practice will give you more clarity when you compare the year-on-year costs. For instance, several companies encourage their business managers or leadership to visit business campuses to promote their employer’s brand. If it is a new program, it is advisable to refrain from including it.
    • Don’t get hassled if you see a considerable increase or dip in your cost per hire. The sharp increase could be due to a new software investment. On the other hand, the steep decline could be due to a hiring freeze. Instead, make it a practice to measure the cost per hire regularly. You can either choose to do it quarterly or yearly depending upon the size of your organization and the quantum of hiring efforts.
    • Use these reports for defining your hiring strategy. It may make more sense to use this cost per hire with other key metrics like quality of hire and time to hire. Consider it to be a positive trend if you see your cost per hire increasing and the quality of hire improving. It is perfectly reasonable if you are spending more money to hire better-quality candidates. Such a trend would mean that your organization is spending less money in the long term.
    • Evaluate and analyze your cost per hire according to departments and levels. Niche roles and higher levels will generally have a higher cost per hire. The trends may help in strengthening your processes to hire for these particular areas. For instance, one sourcing method may give you better quality candidates for a particular department at a lower cost per hire. Such analysis will help you in selecting the best sourcing avenue for that department. Similarly, you can calculate the cost per hire as per different variables for an impactful strategy.
  • To conclude

    Cost per hire is an important metric that can give you deeper insights into your hiring strategy. Firstly, it encourages you to account for all the internal and external costs that go into hiring employees. You may be in for a surprise if you haven’t been tracking them before. Secondly, it can help in rationalizing the leadership expectations from the hiring team. It is often seen that there is high pressure on the recruitment team to reduce the costs while ensuring the quality of new hires. Such metrics may provide more clarity and set their expectations.

    The goal here is not to reduce the cost per hire. Instead, the focus should be on using the metrics to improve the current process. For greater efficiency, it is advisable to use cost per hire with other metrics to identify the weak areas in the hiring process. The final aim should be to optimize costs keeping in view the quality as well as the time of hire.

    impress.ai chatbots can considerably optimize your cost per hire while improving the quality of hire. Firstly, the chatbot can be used to screen every applicant who applies for the job and identify the most qualified candidates. You can significantly reduce your work hours as the hiring team won’t have to manually sift through all the resumes. Moreover, the chatbot can manage candidate queries and free your hiring team to focus more on the strategic aspect of their jobs. The chatbot is customizable to handle your organization-specific or role-specific requirements.

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