The expense of onboarding a new employee can be surprisingly high—and if you haven’t yet analyzed your company’s recruitment spending, you might be in for a surprise. By breaking down your hiring expenses, you can calculate a cost per hire metric that not only improves budgeting but also streamlines your recruitment process, ultimately boosting overall productivity and impacting your bottom line.
In this post, we’ll define cost per hire, explain its importance, and walk you through how to calculate it. Plus, we’ll share a detailed example and explore additional recruitment metrics to help you refine your hiring strategy.
What Is Cost per Hire?
Cost per hire is a key recruitment metric that calculates the average expense incurred to bring a new employee on board. This figure encompasses every cost incurred throughout the recruitment process, such as:
- Sourcing and Advertising: Costs for job board postings, social media ads, and other outreach efforts.
- Screening and Onboarding: Time spent by HR on screening resumes, interviewing candidates, and onboarding new hires.
- Referral Bonuses: Incentives paid for employee referrals.
- Recruitment Marketing: Investments in employer branding initiatives and recruitment campaigns.
- Other Recruitment Resources: Any additional tactics or tools used during the hiring process.
For example, if your company hires 20 new employees over the course of a year and spends a total of $85,000 on recruitment activities, your cost per hire would be calculated as follows:Cost per Hire=$85,00020=$4,250\text{Cost per Hire} = \frac{\$85,000}{20} = \$4,250Cost per Hire=20$85,000=$4,250
While this concept seems straightforward, a comprehensive analysis requires identifying all the hidden costs involved in posting jobs, assessing applicants, and onboarding employees. Overlooking any expense may lead to an inaccurate estimate and missed opportunities for improvement.
Why Does Cost per Hire Matter?
Understanding your cost per hire is critical for several reasons:
- Enhanced Budget Accuracy and Planning:
Accurately calculating recruitment expenses enables you to allocate budgets more effectively and forecast future hiring costs. This precision helps direct resources toward the most impactful recruiting strategies, reducing waste and maximizing ROI. - Identifying Cost-Effective Hiring Channels:
A detailed breakdown of recruitment costs can reveal which channels—be it job boards, social media ads, or employee referrals—yield the best results for the least investment. - Improved Recruitment Efficiency:
When combined with other metrics like time-to-fill and candidate quality, cost per hire highlights inefficiencies in your process, helping you pinpoint bottlenecks and streamline workflows. - Supporting Strategic Decision-Making:
This metric empowers you to align recruitment strategies with broader business goals. For critical roles, a higher cost may be justified if it significantly impacts overall company performance. - Benchmarking Against Industry Standards:
Regular analysis of cost per hire allows you to compare your performance against industry averages and competitors, ensuring you stay competitive in attracting top talent. - Strengthened Accountability and Reporting:
A clear, data-driven cost per hire metric demonstrates the ROI of your recruitment efforts to stakeholders, helping justify budgets and drive continuous improvement.
Breaking Down Recruiting Costs
Recruitment expenses can be divided into two main categories: internal and external costs.
External Recruitment Costs
These include expenditures related to third-party services and platforms, such as:
- Job board fees and advertisement costs
- Recruitment agency commissions
- Fees for background checks or external assessments
Tracking these costs helps you evaluate the return on investment (ROI) of outsourced recruitment efforts.
Internal Recruitment Costs
These cover expenses incurred within your organization, including:
- Salaries of HR personnel involved in recruiting
- Costs related to internal tools and software
- Overhead expenses associated with the recruitment process (e.g., time spent by staff on interviews, onboarding, etc.)
A thorough understanding of both internal and external costs is essential for an accurate cost per hire calculation.
The Cost per Hire Formula
Once you’ve identified all recruitment-related expenses, calculating cost per hire is straightforward. The formula is:Cost per Hire=Total Internal Costs + Total External CostsTotal Number of Hires\text{Cost per Hire} = \frac{\text{Total Internal Costs + Total External Costs}}{\text{Total Number of Hires}}Cost per Hire=Total Number of HiresTotal Internal Costs + Total External Costs
Using our earlier example:
- Internal costs = $50,000
- External costs = $30,000
- Total hires = 20
Cost per Hire=$50,000+$30,00020=$4,000\text{Cost per Hire} = \frac{\$50,000 + \$30,000}{20} = \$4,000Cost per Hire=20$50,000+$30,000=$4,000
This simple formula provides a snapshot of how much it costs your organization to secure a new hire.
Step-by-Step Guide to Calculating Cost per Hire
- Define Your Measurement Period:
Choose a consistent timeframe (month, quarter, or year) for analysis to ensure meaningful comparisons over time. - Gather All Internal Recruitment Costs:
Compile expenses such as recruiter salaries, onboarding programs, and other operational costs. - Account for External Recruitment Costs:
Include all costs associated with external services like job postings, agency fees, and background checks. - Determine the Total Number of Hires:
Count the number of full-time, permanent hires made during your chosen period. Exclude temporary or contract hires unless specified. - Apply the Formula:
Plug your internal and external costs into the formula to calculate your cost per hire. - Break Down Costs by Category (Optional):
For deeper insights, compare internal versus external costs, or evaluate differences across departments or locations. - Review and Validate Your Data:
Double-check your calculations and consult with finance or HR teams to ensure accuracy. - Use Cost per Hire as a Benchmark:
Track this metric over time and compare it with industry standards to evaluate your recruitment efficiency. - Regularly Revisit and Update Your Calculation:
Recruitment expenses can change, so recalculating cost per hire periodically will help you stay on top of trends and adjust your strategies as needed.
Leveraging Cost per Hire Data for Strategic Improvements
Calculating your cost per hire is just the first step. The real value comes from using this data to drive strategic decisions:
- Quantify and Analyze Your Spending:
Break down your overall costs and assess which areas are most effective. This detailed analysis can reveal where adjustments are needed. - Compare Across Departments:
Look at cost per hire statistics by department to identify best practices and areas needing improvement. - Research Industry Standards:
Benchmark your results against industry averages—current figures suggest an average cost per hire of around $4,700, though this varies by role and industry. - Implement Strategic Changes:
Use your insights to shift spending toward more effective recruiting channels and streamline processes, ultimately raising the quality of your hires.
Beyond Cost per Hire: Additional Recruitment Metrics
To gain a comprehensive understanding of your recruitment performance, consider tracking related metrics such as:
- Cost per Hire Comparable (CPHC):
Similar to the standard cost per hire but may exclude or include certain expenses based on industry specifics. - Recruiting Cost Rate/Ratio:
This metric calculates the total recruitment cost as a percentage of the total compensation of new hires. The formula is:Recruiting Cost Ratio=External Costs + Internal CostsTotal Compensation of New Hires×100\text{Recruiting Cost Ratio} = \frac{\text{External Costs + Internal Costs}}{\text{Total Compensation of New Hires}} \times 100Recruiting Cost Ratio=Total Compensation of New HiresExternal Costs + Internal Costs×100
These additional metrics can further refine your recruitment strategy by highlighting areas for cost savings and efficiency gains.
Real-World Example
Consider a company that, over a calendar year, spent $6,500 on external recruitment costs and $9,500 on internal costs. With four new hires during this period, the calculation is as follows:Cost per Hire=$6,500+$9,5004=$4,000\text{Cost per Hire} = \frac{\$6,500 + \$9,500}{4} = \$4,000Cost per Hire=4$6,500+$9,500=$4,000
By closely tracking these numbers, the company can identify inefficiencies in its recruitment process and adjust spending to focus on high-performing channels, thereby reducing overall costs and improving the quality of new hires.
Final Thoughts
Understanding and managing your cost per hire is crucial for making informed recruitment decisions. By breaking down your spending, benchmarking against industry standards, and regularly revisiting your calculations, you can identify inefficiencies, optimize your recruitment strategy, and ultimately improve your bottom line.
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