Every organization has a budget for spending. It is the amount each department has been allocated that they can use. Now, organizations are known to walk the tightrope to ensure that they remain profitable by balancing their investments. Some departments receive 100% budget approvals while a few others are on the receiving end of budget constraints.
Although hiring and talent acquisition gets in talent and expertise, which eventually contributes to the company’s top line, recruitment has stringent metrics to maintain a consistent bottom line for the organization.
‘Cost per hire’ is one such parameter that helps an organization understand the costs involved in hiring employees. This is an essential yet tricky calculation since there are several intangible and hidden costs in the recruitment process.
What is “Cost per Hire”?
‘Cost per hire’ is the total cost incurred in recruiting one employee into the company. According to the Society for Human Resource Management (SHRM), the average cost per hire in 2022 was approximately $4700.
Now, the calculation of ‘cost per hire’ is tricky since there are costs that are tangible as well as intangible.
- Tangible Internal costs include infrastructure and administrative costs, recruiter salaries, and employee referral bonuses
- Tangible external costs are candidate sourcing costs, recruiting consultant fees, assessment tools costs, marketing, and advertising costs, career fairs, background checks, technology costs (recruitment software), and signing bonuses
- Intangible and indirect costs include interview costs (no. of hours invested in interviewing), coordination costs, onboarding costs, travel costs, etc. Another factor that indirectly contributes to costs is ‘time to hire’, which also indicates the efficiency of the hiring process.
Depending on the organization’s recruitment process and the nature of the positions to be filled, any or all of these costs may come into play.
Identifying significant trends in the organization’s ‘cost per hire’ costs can give recruiters great insight into the pool of candidates they are looking to hire in the future.
Importance of Cost per Hire
For larger organizations, calculating ‘cost per hire’ may look taxing; fortunately, there are several technological tools today that simplify this activity. However, this activity gives the organization great returns, in terms of insight and strategic information.
Calculating ‘cost per hire’ is important for:
- maintaining a lower bottom line
- strategic budget forecasting and decision-making
- estimating the average cost incurred for “difficult-to-fill” positions
- measuring the effectiveness of the recruitment process
- calculating the recruiter’s efficiency
- ratifying existing sourcing channels
- succession planning (combined with the retention rate and performance matrices)
Key factors in cost per hire
The primary factors in quantifying ‘cost per hire’ are:
Companies in the same industry have similar job roles, demands, and industry standards. Understanding the industry benchmarks makes it easier for organizations to plan and manage their recruiting costs for a selected set of qualified candidates.
Hiring costs for offices in metro cities are much higher than hiring for 2 and 3-tier cities. Often, recruiters find it cheaper and mutually beneficial to ask candidates to relocate from metros to smaller cities or towns.
#3 Position and level
There is a marked variation in incurred costs while hiring executive, management, and non-management candidates. Also, qualified candidates with niche & in-demand skills expect a higher salary.
#4 Company size
Larger organizations have a higher CPH since they have more resources available to them. Often, their processes are also streamlined and efficient.
Framework to calculate cost per hire
The formula is:
Cost per hire = (internal recruiting costs + external recruiting costs) Total number of hires
The prudent way of maintaining a lower CPH is to follow some best practices:
- Review the hiring process regularly to fix gaps and improve efficiency
- Innovate to identify the right talent for your organization
- Train and develop skills of recruiters to shorten ‘time for hire’
- Automate or create systems to track hiring stages and onboard employees
To meet the goal of every organization to gain maximum efficiency, regularly reviewing the ‘cost per hire’ can help recruiters manage their costs. Remember that it is easier to manage the process efficiently rather than have constraints laid on your hiring budgets!
FAQs on Cost per Hire
What is Cost-per-Hire?
An important recruiting metric, ‘Cost per hire’, is the total cost incurred in recruiting one employee into the company. Identifying significant trends in the organization’s ‘cost per hire’ costs can give recruiters great insight into the pool of candidates they are looking to hire in the future.
It consists of the below:
Tangible internal costs such as infrastructure & administrative costs, recruiter salaries & employee referral bonuses
Tangible external costs such as sourcing, marketing & advertising costs, recruiting consultant fees, assessment tool costs, background checks etc.
Intangible & indirect costs such as interview costs (no. of hours invested in interviewing), coordination costs, onboarding costs, travel costs, etc.
Why is it important to know the Cost-per-Hire?
Cost-per-Hire is an important recruiting metric as it provides information and insights into the hiring spend in each phase of the hiring, helping validate and optimize it, based on company priorities and needs. Some of the reasons why it is important to track the Cost-per-Hire are:
Maintaining a lower bottom line
Strategic budget forecasting and decision-making
Estimating the average cost incurred for “difficult-to-fill” positions
Measuring the effectiveness of the recruitment process
Calculating the recruiter’s efficiency
Ratifying existing sourcing channels
Succession planning (combined with the retention rate and performance metrics)
What are the key factors that influence Cost-per-Hire?
Cost-per-Hire is a key recruiting metric that is affected by many factors, with the key ones detailed below:
Industry – Different industries have different standard costs, depending on skills, roles & demands
Location – Hiring costs in metro cities are much higher than hiring for 2 and 3-tier cities, driving many companies to run operations from smaller cities or towns
Position & Level – Costs incurred for procuring talent vary while hiring executive, management, and non-management candidates with a premium for qualified candidates with niche & in-demand skills
Company Size – Larger companies & Enterprises often have a higher Cost-per-Hire based on the skills & expertise required for their products & services
How do you calculate Cost-per-Hire?
Cost-per-Hire can be calculated on the basis of the internal & external hiring costs for a specific period and the total number of employees hired in that period. The formula for calculating Cost-per-Hire is as follows:
Cost per hire = (internal recruiting costs + external recruiting costs)
Total number of hires
How do you reduce Cost-per-Hire?
Some of the best practices to reduce or maintain a low Cost-per-Hire are given below:
Review the hiring process regularly to fix gaps and improve efficiency
Innovate to identify the right talent for your organization
Train and develop skills of recruiters to shorten ‘time for hire’
Automate or create systems to track hiring stages and onboard employees