At Applicantz, we know that understanding your recruitment expenses is crucial for optimizing your hiring process.
The cost per hire formula is a key metric that can shed light on your recruitment efficiency and budget allocation.
In this step-by-step guide, we’ll break down how to calculate your cost per hire accurately. This knowledge will empower you to make data-driven decisions and streamline your recruitment strategies.
What Is Cost Per Hire?
Definition and Calculation
Cost per hire is a fundamental recruitment metric that measures the average amount a company spends to fill a job opening. This metric provides valuable insights into recruitment efficiency and budget allocation. To calculate cost per hire, add all recruitment expenses and divide by the number of hires made in a specific period. These expenses include both internal costs (e.g., recruiter salaries) and external costs (e.g., job board fees).
The Importance of Tracking
Tracking cost per hire offers several benefits:
- Accurate budgeting for future hiring needs
- Comparison against industry benchmarks
- Identification of trends and areas for improvement
According to the Society for Human Resource Management (SHRM), the average cost per hire was nearly $4,700.
Influencing Factors
Several elements impact cost per hire:
Industry Competitiveness
The job market competitiveness in your industry plays a significant role. For example, hiring for tech roles often costs more due to high demand for skilled professionals.
Company Size and Location
A company’s size and location affect recruitment costs. Smaller companies might have lower overall costs but higher per-hire costs due to less efficient processes. Urban locations typically have higher recruitment costs than rural areas.
Position Level
The level of the position you’re filling is another crucial factor. Executive hires can be particularly costly, with potential impacts on strategy, morale, and growth if the hire is unsuccessful.
Recruitment Channels
The channels used for recruitment (e.g., job boards, recruitment agencies, employee referrals) can significantly impact costs. Some channels may be more cost-effective than others, depending on the role and industry.
Understanding these factors helps contextualize your cost per hire and informs decisions about recruitment budget allocation. The goal isn’t always to have the lowest cost per hire, but rather the most effective hiring process for your specific needs.
As we move forward, we’ll explore the various components that make up the cost per hire calculation, providing a deeper understanding of this essential metric.
What Are the Key Components of Cost Per Hire?
At Applicantz, we understand the importance of breaking down cost per hire components to transform recruitment strategies. This chapter will explore these components to provide a clearer picture of your hiring expenses.
Internal Recruiting Costs
Internal costs are expenses incurred within your organization during the hiring process. These typically include:
- Recruiter salaries and benefits
- Time spent by hiring managers on interviews and candidate evaluation
- Employee referral bonuses
- Costs associated with maintaining an internal recruitment team
- Technology costs for applicant tracking systems and other HR software
The Society for Human Resource Management reports that the average cost to hire an employee is $4,700, with around 44 days to fill a position. This significant expense highlights the need to optimize internal processes.
External Recruiting Costs
External costs are those paid to outside entities during the recruitment process. These often encompass:
- Job board postings and advertising fees
- Recruitment agency fees
- Background check and pre-employment screening costs
- Travel expenses for candidates
- Employer branding and marketing expenses
A study by Bersin by Deloitte found that U.S. companies are spending nearly three times the amount spent on training on recruitment. This figure can vary widely depending on the industry and position level.
Fixed vs. Variable Costs in Hiring
Understanding the difference between fixed and variable costs in hiring will help you better manage your recruitment budget:
Fixed costs remain constant regardless of the number of hires. These might include:
- Annual subscriptions to job boards or HR software
- Salaries of full-time recruiters
- Office space for the recruitment team
Variable costs fluctuate based on hiring volume. Examples include:
- Background check fees
- Travel expenses for candidates
- Agency fees for specific placements
Categorizing your costs this way allows you to identify areas where economies of scale might apply and where costs might spike during high-volume hiring periods.
Technology and Tools
The use of technology and tools in recruitment can significantly impact cost per hire. This includes:
- Applicant Tracking Systems (ATS)
- Video interviewing platforms
- AI-powered screening tools
- Recruitment marketing software
While these tools require an initial investment, they can lead to long-term cost savings by streamlining processes and improving efficiency (e.g., reducing time-to-hire and increasing quality of hire).
Employer Branding Expenses
Employer branding is an often overlooked component of cost per hire. This includes:
- Career site development and maintenance
- Social media presence and management
- Employee testimonial videos
- Participation in job fairs and industry events
A strong employer brand can reduce cost per hire by attracting highly qualified candidates and decreasing job advertising expenses.
Tracking these components meticulously will give you a comprehensive view of your cost per hire. This knowledge empowers you to make data-driven decisions about resource allocation and process improvements in your recruitment strategy. Now that we’ve explored the components of cost per hire, let’s move on to the step-by-step guide for calculating this essential metric.
How to Calculate Cost Per Hire: A Practical Guide
Gather Comprehensive Cost Data
The first step in calculating cost per hire involves collecting all recruitment-related expenses for a specific period (typically a year). This includes both internal and external costs. Internal costs encompass recruiter salaries, employee referral bonuses, and HR technology expenses. External costs include job board fees, agency commissions, and candidate travel expenses.
Don’t overlook hidden costs. For instance, the time hiring managers spend on interviews represents a significant expense. The average length of the interview process in the US is 23.8 days (according to a Glassdoor study). Calculate the cost of this time based on the managers’ hourly rates.
Sum Up Total Recruiting Costs
After collecting all cost data, add up the expenses. Use a spreadsheet to categorize and total your expenses. This not only helps in calculation but also provides a clear breakdown for future analysis.
For example, if your total internal costs are $150,000 and external costs are $50,000, your total recruiting costs would be $200,000.
Count the Number of Hires
Next, tally the number of new hires made during the same period for which you calculated the costs. Include all types of hires – full-time, part-time, and contract positions. However, exclude internal transfers or promotions as these don’t typically incur the same recruitment costs.
Execute the Calculation
Now, divide your total recruiting costs by the number of hires. The formula is:
Cost Per Hire = Total Recruiting Costs / Number of Hires
For instance, if your total recruiting costs were $200,000 and you made 40 hires, your cost per hire would be $5,000.
This figure provides a baseline for your recruitment efficiency. The average cost per new hire is $4,683 according to the Society for Human Resource Management (SHRM). Compare your result to this benchmark and to your industry standards to gauge your performance.
A higher cost per hire isn’t necessarily bad if it results in higher quality hires or improved retention rates. It’s important to analyze this metric in context with other recruitment KPIs.
Utilize Technology for Accuracy
Applicant Tracking Systems (ATS) can significantly improve the accuracy and efficiency of your cost per hire calculations. These systems can automatically track and categorize recruitment expenses, saving time and reducing the risk of human error. Many vendors offer tiered pricing models, allowing you to start with basic features and scale up as needed.
Final Thoughts
The cost per hire formula empowers organizations to optimize their recruitment processes. This metric provides valuable insights into hiring efficiency and guides budget allocation decisions. Companies can benchmark against industry standards, identify improvement areas, and make data-driven choices to enhance their recruitment strategies.
Technology plays a vital role in streamlining recruitment and reducing costs. Applicantz offers an all-in-one hiring software that can significantly improve hiring efficiency with features like AI-powered job posting and automated interview scheduling. Employee referral programs and strong employer branding also contribute to cost-effective talent acquisition.
The most effective hiring process, rather than the lowest cost per hire, should be the ultimate goal. A slightly higher cost might be justified if it results in higher quality hires or improved retention rates. The cost per hire metric (when considered alongside time-to-hire and quality of hire) forms a comprehensive picture of recruitment effectiveness.
