Cost Per Hire [And All You Need To Know About It]

Posted 10 months ago by

Metrics or key performance indicators are vital to a company’s success. They are the specific values which give an indication of an organization’s overall health and performance.

Recruiting metrics are measurements used to evaluate the recruiting process, track hiring success, optimize the hiring process and determine whether or not your company is hiring the right people.

For a recruitment team, one of the most important metrics they must measure is cost per hire, because regardless of the size of the company or agency, all recruiters will be restricted by their budget.

The only way a recruitment team can determine what a suitable budget for hiring is is to keep track of how much money they are spending during their recruitment process, in particular, where the money is spent and how much money was spent to hire a candidate.

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What is cost per hire?

Cost per hire is the economic value placed on the total financial investments an organization makes to attract and recruit new employees.

It should be noted that cost per hire should not be used to determine the success or failure of an organization’s recruiting abilities. Instead, it should be used as a benchmark for the organization’s ongoing recruitment activities. More on this later.


Why should you measure cost per hire?

Because it takes money to make money and recruiting the top talent doesn’t come cheap.

Recent research from Bersin by Deloitte indicates that those companies with the most mature talent acquisition programs actually spend more on the average hire, than those companies who are still trying to figure out the recruitment process for themselves.

Why is this?

Because mature companies know that each hire is unique, and therefore the approach to each one has to be unique too.

If you run a successful company, in order to keep on rising, you need the best employees, but they’re probably already working for someone else, so you have to attract their attention and persuade them to come over and work for you.

So if you’re new to recruiting, this isn’t to say that you should throw as much money as you can at the recruitment process but instead, measuring each cost per hire should give you an idea of on average how much you have to spend to hire the top candidates.

Companies Measuring Cost Per Hire

Cost pre hire is among the most measured recruitment metrics.

But if each hire is unique, and the cost varies every time, why do these figures matter?

Because when you’re driven by the bottom line, reducing costs wherever possible makes good business sense. And even though each hire is unique, the process involved isn’t.

Plus, how can you measure a company’s success if you don’t keep track of how much money you’re spending to get there?

Although this metric is time-consuming to calculate, it is a worthwhile task as, put simply, measuring cost per hire will give you an overview of:

  • •  Where you’re spending your budget inefficiently.
  • •  Where the most recruitment money is spent.
  • •  Where you can optimize your expenses.

By measuring and comparing cost per hire over time, you can also establish the efficiency of new tools and techniques implemented.


How to measure cost per hire?

To determine the average cost per hire, the calculation itself is relatively simple: add up all the costs involved with the hire – the internal recruiting costs and the external recruiting costs, and divide this grand total by the number of hires in a specific time frame.

Cost per Hire formula:

Cost per Hire formula

To clarify, internal recruiting costs include but are not limited to:

  • •  In-house talent acquisition team salaries
  • •  Talent acquisition system costs – hardware and recruiting software
  • •  Salary costs of time spent by hiring managers
  • •  Interview costs (# of hours multiplied by hourly salary of interviewer or hiring manager)
  • •  Learning, benefits and & career development costs for your recruiting team
  • •  Other fixed costs such as employee referral bonuses, government compliance, etc.

It is worth noting that internal costs can include resource allocation from one team to another for recruitment purposes, even if the money to pay for it stays within the company.

External recruiting costs include but are not limited to:

  • •  Third-party fees, such as agencies
  • •  Advertising costs including job boards and social media
  • •  Job fair and campus recruiting costs
  • •  Employer branding activities
  • •  Travel expenses for recruitment
  • •  Technology costs (e.g., recruiting software)
  • •  Aptitude test providers
  • •  Assessment centers
  • •  Drug testing
  • •  Background checks
  • •  Applicant Tracking System (ATS) fees
  • •  Fixed costs such as physical infrastructure (e.g., office rental)
  • •  Signing bonuses

Cost per hire is a key metric, but rarely are you going to be doing a one-off hire, so more than likely you will need to establish the average cost per hire. This average can be determined over any length of time frame you deem suitable: quarterly, a recruitment campaign, a year.

The time period, quarterly, a recruitment campaign, a year, should also be used when working out the total number of hires.

Total number of hires includes all new employees, whether they work full time or part time, or whether they are temporary or permanent. The recruitment costs should reflect the expenses required to hire all types of employees in that given time period. If you need to, you can do a deep dive into each specific hire later.

Another point to mention is that cost per hire differs with the role you’re hiring for and the seniority of the person required.

That’s why you can calculate cost per hire based on various categories. These include:

  • •  Job position
  • •  Department
  • •  Leadership level
  • •  Source of hire

For example, cost per hire for certain roles may be higher than in others because of higher demand. Currently, there is a great demand for software developers, which might lead to increased cost per hire. Conversely, you’re not going to spend the same amount of money recruiting for a receptionist as you would hiring a CFO.

Executive Cost Per Hire

One final point: cost-per-hire calculations don’t include any costs after employees are hired, e.g. onboarding costs, training costs.


Average Industry Benchmarks

So now that you’ve worked out your average cost per hire, you’re probably going to want to compare it to the national average, because let’s face it, we all want to know how we are doing and the easiest way to do that is to compare what we are doing to someone else. Here a few industry benchmarks:

  • •  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.

Take these figures with a pinch of salt and bear and remember that cost per hire will vary drastically from one business to another, depending on the variety and volume of skills sought, and the approach used to recruit quality hires (it ranges from $3,033 in healthcare to $5,611 for manufacturing jobs).

Now, that’s all well and good reading these figures and comparing them to what you’re spending on recruitment, but what do they actually mean for you? How do you know if that is a lot of money to be spending on recruitment or a little? Is it worth it?

Entry-level Employee Cost Per Hire

Well, these figures are a useful starting point. But the only way that this data will actually be of any use to you specifically, is if it was your industry benchmark data. And it isn’t. It’s an average cost per hire across all manner of industries.

So to be brutally honest, the best cost per hire benchmark data to compare how your recruitment team is doing, will be your company’s internal, year-on-year data, outlining changes in cost per hire that can only come from a consistent measurement.


Best practices for establishing cost per hire: Dos and Don’ts

DO always calculate cost per hire including the same partial costs, unless new costs incurred. This means that if you decide to omit employer branding costs once, don’t include it another time and then compare the two results.

Whatever the costs include, internal or external, the key to worthwhile data is consistency. Essentially, if you are taking the time to measure cost per hire on a regular basis, make sure you are consistently comparing the same data.


DO NOT be afraid if you see your cost per hire increasing or decreasing. An increasing or decreasing cost per hire could indicate any number of things:

    • ○  You’ve invested in new recruiting software.
    • ○  You’ve taken new approaches to advertising and social media recruitment.
    • ○  You’ve invested in increasing recruiting headcount to handle higher hiring volume.
    • ○  You’ve adopted a more holistic approach to talent acquisition, one which emphasizes improving the candidate experience over outdated traditional methods.

Remember, cost per hire depends on hiring volume. The more people you hire, the lower your cost per hire will be as some of the fixed costs, such as staff salaries and building rent, can be spread out over a larger number of hires.

Also, some roles (executive roles) and industries (engineering for example) will take a  longer time to fill and so the accumulated costs of a longer hiring process result in higher costs per hire, but over a long period, a quality hire will pay for itself.


DO calculate the cost per hire regularly to get a more accurate overall picture. Examining your cost per hire regularly will clearly demonstrate the effectiveness of a process improvement, a technology or automation project, or a recruiting event that you may have partaken in.

Remember, an increase in costs isn’t something you should view negatively right away.


DO NOT treat cost per hire as a separate metric, consider it together with time to hire and quality of hire to get the full picture. A large investment in recruitment may result in better overall quality of hire, which, at the end of the day, will always result in the company saving money.


DO analyze your cost per hire by department and position. Knowing your average cost per hire is helpful, but comparing your cost per hire data by department and position will help identify areas for process improvement and help lower costs overall.


DO NOT let cost per hire be the sole driver in your recruitment campaign. If you focus too much on the bottom line, you risk losing sight of why you’re spending money on recruiting in the first place, which is to attract quality hires. So spend your budget wisely, spend money with quality in mind, and your cost per hire will be worth it.


DO calculate the cost per hire by source of hire to determine the most efficient sources and weed out the inefficient ones.


 

To conclude

Cost per hire is one of the most important recruiting metrics, with over 40% of companies reporting measuring it. Although this metric consists of numerous partial costs and can take time to figure out, its calculation will undoubtedly benefit your organization.

Gaining insight into how much you’re spending per hire will give you a deeper understanding of where exactly your budget goes and where improvements can be made. However, always look at cost per hire in relation to other metrics such as time to hire and quality of hire to find out how your company is doing.

Happy measuring!

Alexandra

Alexandra Johnson is a seasoned writer specializing in HR, recruitment and tech topics. When she isn’t at her desk writing, she’s researching tech developments.