Hiring Cost: Breaking Down Cost-Per-Hire

What is cost-per-hire?

When you bring on a new employee, how much money does it actually cost? A common key performance indicator (KPI) in human resources and recruiting is cost per hire. If you know how much it will cost to attract a new employee, you can allocate your recruitment budget more wisely. Put another way, it gives an idea of how much it will cost to fill positions that are difficult to fill and aids in decision-making on the expenses of hiring.

Some of the expenses of filling a position with a new person are easy to see, while others are more subtle. To illustrate the point, how can one determine the exact amount of promotional materials required to post a job opening? Another question is how to figure out how much an interview will cost. Because of this, the cost per hire is both a crucial and a challenging indicator to track when it comes to talent acquisition and recruitment. First, we’ll go over what “cost per hire” is and how to figure it out.

The recruiting metric known as “cost per hire” calculates how much it costs to bring on new staff. Costs associated with sourcing and recruitment, advertising, onboarding, referral bonus programs, etc., fall under this category. As an illustration, consider a scenario where you bring on 50 new employees for the year and allocate $100,000 towards the hiring process. This works out to $2,000 each hire. You can use it to see how well your hiring process stacks up against others in your field and for similar positions.

Additionally, it helps to identify noteworthy trends when comparing departments quarterly and annually.

How much it costs to hire new employees depends on a number of things.

To help you determine if your cost per hiring is competitive, SHRM has created an industry benchmark.

Total cost of hiring

The usual method for calculating the cost per hire is:

Divide the sum of all recruitment expenses (both internal and external) by the total number of hires to get the cost per hire.

Exactly what are the components of internal and external costs? Here are a few instances for you to see. Remember that the items listed here are by no means complete. The American National Standards Institute’s Cost-per-Hire Standard publication has more details.

Internal expenses 

• Costs related to ensuring compliance include keeping track of and processing relevant documents (such as legal and procedure manuals)

• “Administrative costs” include items like rent, food, hotel bills, office supplies, and anything else that goes into supporting the recruitment function. You can use a percentage of the total administrative cost that is dependent on the recruiting headcount if it is impossible to designate the actual administrative cost of recruitment.

• The expenditures incurred by the organization in order to educate and improve the abilities of its recruitment personnel. Both online and offline training options are considered, such as the Talent Acquisition certificate program.

• The total cost of your sourcing and recruitment team, including base pay, bonuses, and perks, is known as recruitment/staff costs.

• The expense of the hiring manager: In most companies, the hiring manager is in charge of other departments. That means the company will have to pay for your time away from the office doing interviews.

External expenses 

• The expenses related to verifying a candidate’s suitability for employment include background checks. All of the following are part of the background check process: educational background, criminal record, immigration status, references, credit, etc.

• The costs associated with pre-screening a candidate to ensure they meet the first recruitment requirements (such as assessments, tests, and automated interviews) are known as pre-screening expenses.

• Cost of sourcing, participation in professional associations, and the acquisition of databases containing relevant information all constitute sourcing expenditures.

• An organization’s technological expenditures in the recruitment process include things like the application tracking system, application processing infrastructure, system maintenance, and other related costs.

• Both the candidate and the recruiter are responsible for covering their own travel expenses. These expenses cover things like airfare, hotel stays, and more.

• Marketing expenditures: These cover anything from social media marketing and search engine optimization to website maintenance and postings on job boards.

• Expenses related to employee referrals: This would be the case if you implemented an incentive program to motivate employees to refer one another.

• Signing bonus: A cash payment made to a new hire to entice them to the organization.

• Third-party costs: These could come from places like a trade group or an outside firm that helps you find potential candidates or suppliers.

• Job fair costs: Renting tools, shipping, design, booth costs, labor, and rental fees are all costs that come with putting together a job fair.

You should also factor in the expenditures associated with drug testing, campus recruitment, and relocation. To find out how much your company spent on recruitment overall, including both internal and external factors, you have to examine every step of the process. The aforementioned expenses might be relevant in some cases, while others might not even be on the table at all.

Overall headcount

How many people you wind up hiring is directly related to your goal for the cost-per-hire calculation. The people you bring on board could come from inside your company or from other sources. Workers on short-term contracts, freelancers, and temporary workers could potentially be a part of it. However, it may not include workers who are transferred due to an acquisition or merger, or who are paid by an outside entity.

When you’re figuring out your cost per hire, the amount is dependent on the time period you’re using. Take a look at the overall headcount for a certain quarter or the whole year as an example.

How is the cost per hire determined?

You must compile all of your internal and external cost data in order to compute the cost per hire. You should also decide how often you will be doing the calculations (monthly, yearly, biannually, quarterly, etc.). Another option is to break down the average cost per recruit by department or even job function. As an example of how to compute costs per hire, we’ll walk you through the four processes.

Step 1: Compile all of your expense data

Finding your expenditure report for a given time period should be your first order of business. Collect this information from the accounting department and, to the best of your ability, separate out the expenses incurred by the hiring team.

Step 2: Figure out what you owe to yourself

Put all of the expenses associated with internal recruiting into a single column on a spreadsheet. Take the insurance company Exxaro Incorporated as an example; let’s figure out their internal costs.

October internal expenses

Sourcing expense: $2,000

Costs of the recruitment team: $4,000

Legal fees: $500

Obtaining necessary office equipment: $500

The sum total: $7,000

Step 3: Figure out your external costs

Put everything related to external recruiting expenses in one column:

October external expenses 

Background checks: $2,500

Initial screening costs: $1,000

Total sourcing costs: $2,000

Costs associated with technology: $4,000.

Agency costs: $2,000

Marketing expenses: $5,000

Total cost: $16,500

Step 4: Finish the math

Assume that October was the month in which you hired five new employees. The end result of your spreadsheet-based calculation will resemble this:

Internal expenses: $7,000.

External expenses: $16,500

Headcount: 5

Cost per hire: $4,700

The cost-per-hire calculation is as follows:

(7,000 + 16,500) / 5

On average, it costs $4,700 to hire one person. Is that awful? Is that acceptable? As far as the SHRM industry average is concerned, that is marginally higher than the overall average.

That is not to say that it is expensive; the price is according to the situation. It is reasonable to anticipate and accept operating over the industry average if, for instance, you engaged five actuarial scientists in October. Consider reevaluating your approach to find ways to lower your cost-per-hire if, for instance, you were hiring for a less specialized position.

Why is it important to track the cost per hire?

One way to improve the hiring process is to calculate the cost per hire.

Allocating funds for human resources and recruitment: To better plan for the next period’s hiring budget, it’s a good idea to keep tabs on your cost per hire statistics. It gives a clear picture of the recruitment’s impact on the company’s bottom line and helps with annual cost projections. For instance, Ericsson cut their cost per hiring in half by implementing a variety of employee outreach and social media campaigns. High retention rates were another outcome of the related activities, which led to a decrease in expenses. As a result, the HR and recruitment budget saw a marked improvement, thanks to less work and money spent on onboarding.

Controlling expenses: The pursuit of a lower cost per hire is not necessarily required. There will be a difference in the cost each hire depending on the difficulty of the position. On the other hand, you should check the value you’re getting before making a purchase. For instance, Nokia saw potential in making Indeed its go-to job search site. Indeed users may bypass the middleman and submit their information straight to Nokia’s application tracking system. Nokia was able to cut its cost per recruit by 74% compared to the business average (through other platforms) because to this strategic approach.

Assessing the efficacy of recruitment agencies: You may also see how well your recruiters are utilizing their resources with this indicator. Take Nature’s Pride as an example; they were in the midst of a period of explosive growth for their company. The business realized that by relying on outside recruitment firms, it was unable to build the capacity of its own recruitment team, which became increasingly problematic as the demand for recruits increased. The decision to handle all aspects of the hiring process in-house allowed them to monitor progress and evaluate outcomes, among other strategic considerations. The effect was a drop of about $1,100 per hire.

In conclusion

To get the most out of your recruiting budget and strategy, it’s a good idea to calculate your cost per hire. If you want a good picture of how much it costs your company to hire new employees, you need to record all of your spending, both internal and external. When determining the cost per hire, it is important to examine many factors, such as the position being filled, the talent’s demand, and the organization’s size. A one-size-fits-all strategy will not work in this regard.