Cost per hire is the average expense you made for hire. This valuable data plays a pivotal role in managing your recruitment budget effectively. In the United States, the average cost per hire is approximately $4,000, while in Europe, it stands at €4,494.
Understanding and tracking your cost per hire can significantly improve your recruiting Return on Investment (ROI).Companies can use this metric to determine budget and strategy for sourcing, the best source of hire, or to measure recruiters’ performance. Unfortunately, only 41% of companies regularly track costs related to hiring. The beauty of this recruitment metric lies in its standardization by the Society for Human Resource Management (SHRM).
Steps to Calculate Cost per Hire
To accurately calculate the Cost per Hire of your organization, you need to determine the internal and external costs associated with recruitment. To summarize, these are the steps to create Cost per Hire report:
- Define a Specific Timeframe: Determine the specific period for which you want to calculate the Cost per Hire.
- Select the Appropriate Cost per Hire Type: Choose a Cost per Hire type that aligns with your organization’s needs.
- Calculate Internal Costs: Assess the internal expenses associated with recruiting.
- Calculate External Costs: Analyze the external costs incurred during the hiring process.
Types of Cost per Hire Metric
The type of Cost per Hire metric you choose should align with your organization’s size and key performance indicators (KPIs). You can opt for one of three types:
- CPHI, Internal: Measures costs specific to your organization.
- CPHC, Comparable: Suitable for cross-organizational comparisons.
- RCR, Recruiting Cost Ratio: Compares the total cost of hiring against the total compensation of newly hired individuals in their first year of employment.
The Basic Cost per Hire Formula
The Internal CPH metric measures the costs associated with the sourcing, recruiting, and staffing activities of an employer to fill an open position. CPH is a ratio of the total amount spent on the total number of hires in a specific period. You shouldn’t include data on freelancers or outsourced workers. The formula should consist of costs correlated to the same period. The formula is as follows:
What to Include in Cost per Hire?
When calculating Cost per Hire, it’s essential to account for all relevant recruiting expenses. These expenses can be categorized as internal and external, as outlined in the CPH formula. Creating a comprehensive list of potential recruiting expenses will help you build a precise spending plan. As shown in the CPH Formula, Costs may be internal and external.
External costs incorporate everything your company pays to external vendors or individuals for recruiting. Think about job boards, social media ads, recruitment agencies, background checks, and much more than this. Expenses may include, but are not limited to:
- Advertising and Marketing Expenses, Job Boards for Example
- Background Checks and Eligibility to Work Expenses
- Campus Recruiting Expenses
- Consulting Services
- Contingency Fees
- Drug Testing Expenses
- Employee Referral Awards
- Immigration Expenses
- Recruiting Events Expenses
- Pre-hire Health Screens
- Pre-screening Fees
- Recruitment Process Outsourcing (RPO) Fees
- Relocation Fees
- Sourcing Costs, Licences like LinkedIn
- Travel and Expenses
- Technology Costs
- Third-party Agency Fees
Annual external costs should be prorated based on the selected period.
Example: Recruitment Process Outsourcing Fee is $36,000 annually, and you’re researching six months. This cost would be calculated as $3,000 / 12 months x 6 = $18,000 for the 6 months.
Internal costs cover all of the in-house resources supporting hiring. These expenses may include, but are not limited to:
- Cost of Recruiting Staff
- Cost of Sourcing Staff
- Internal Overhead for Government Compliance
- Office Costs (actually, this one is quite funny, cause it refers to how much space your recruiters are taking)
- Recruiting Learning and Development
- Secondary Management Cost of Time for Events – refers to Hiring Managers time spent on Events
- Secondary Management Cost of Time for Recruiting – refers to Hiring Managers’ time spent on interviewing.
Sum up the expenses within each of the identified internal cost categories to calculate the total internal hiring costs.
If your company has multiple office locations, you can use Comparable Cost per Hire. CPHC is designed for cross-organizational comparisons, making it a valuable tool for benchmarking and assessing the efficiency of hiring processes on a broader scale. The primary objective of CPHC is to enable organizations to gain valuable insights into how their hiring costs stack up against industry standards, competitors, or other departments within their own company. By utilizing CPHC, companies can make data-driven decisions to enhance their hiring strategies, allocate resources more effectively, and identify areas for improvement.
To calculate Cost per Hire across the organization, use the same formula we presented before.
BUT there is a trick.
External Cost variables stay the same. However, Internal Costs are limited to:
- Total Cost of Recruiting Staff Expenses
- Total Cost of Sourcing Staff
- Non-labor Office Costs
- Recruiting Learning and Development
Here are the key components and characteristics of Comparable Cost per Hire:
1. Cross-Organizational Comparison: CPHC allows organizations to evaluate their hiring costs relative to other entities, whether those are competitors in the same industry, other departments within the organization, or industry benchmarks. This broader perspective helps in understanding where an organization stands in terms of recruitment cost efficiency.
2. Standardized Calculation: To ensure consistency and comparability, CPHC employs a standardized formula for calculating hiring costs. This formula typically considers both internal and external costs but restricts the scope of internal costs to specific categories, ensuring uniformity in cost calculation.
3. Limited Internal Cost Categories: While CPHC includes internal costs, it confines these costs to a set of predefined categories. These typically include expenses related to recruiting staff, sourcing staff, non-labor office costs, and recruiting learning and development. By standardizing these categories, CPHC facilitates meaningful comparisons across different organizations or units.
4. Informed Decision-Making: Organizations can use the insights derived from CPHC to make informed decisions about resource allocation, process improvement, and overall recruitment strategy adjustments. Whether it’s optimizing budget allocation or identifying areas where cost savings can be achieved, CPHC provides the necessary data for strategic planning.
5. Continuous Improvement: CPHC encourages organizations to strive for continuous improvement in their hiring processes. By regularly monitoring and comparing their hiring costs, companies can set goals for cost reduction and efficiency enhancement, ultimately benefiting their bottom line.
Recruiting Cost Ratio
Usually, companies analyze the cost of hire by the number of hires for a specified period. But, if you want to analyze the costs of hire by the total compensation of hires for the period, you should use the Recruiting Cost Ratio. To calculate Recruiting Cost Ratio, use this formula:
Unlike CPHI and CPHC, RCR provides results in percentages, allowing you to gauge the proportion of your organization’s expenses devoted to talent acquisition. For reference, you can conclude that for each $1, your organization spent 10 cents on talent acquisition.
As we’ve explored the significance of Cost per Hire metrics and the critical role they play in shaping your recruiting strategies, it’s clear that optimizing your hiring process is more important than ever.
Recrooit is committed to helping you reduce your cost per hire by connecting you with top talent through the power of referrals.
Tap into a network of professionals who can help you find the perfect fit for your organization by posting your job for free on Recrooit. Our community is here to assist you in finding the right candidates and streamlining your recruitment efforts. Your next great hire may be just a click away – start hiring!