How to Calculate Cost Per Hire: A Step-by-Step Guide
Let’s face it—hiring isn’t just time-consuming, it’s costly. In fact, a recent study by the Society for Human Resource Management (SHRM) found that the average Cost Per Hire is around $4,700i. For organizations that are scaling rapidly or rely on high-volume hiring, these costs can quickly add up. If you’re not keeping a close eye on your hiring expenses, you could be overspending by tens of thousands of dollars annually without even realizing it.
But here’s the good news: by understanding how to calculate your Cost Per Hire accurately, you can take control of your recruiting budget, optimize your hiring process, and make smarter financial decisions. This guide will explore everything you need to know to get started. But first, let’s break down what cost per hire means, and why it’s critical.
What is Cost Per Hire?
In simple terms, Cost Per Hire measures the total expense of bringing a new employee onboard. It’s like getting a receipt for every dollar spent during the hiring process—from job ads to recruiter fees, interview costs, and beyond. When calculated correctly, it can reveal where your recruiting dollars are going and, more importantly, where you can save.
Why Cost Per Hire Matters
If you’re not tracking your Cost Per Hire, you’re essentially flying blind. By understanding this metric, you gain a clearer view of your recruitment budget, which leads to smarter financial planning and better hiring decisions.
- Save Money and Optimize Spending: According to LinkedIn’s Global Talent Trends report, organizations that focus on optimizing their recruitment metrics can reduce overall hiring costs by up to 18%. Knowing your CPH helps you identify which hiring channels and strategies are yielding the best ROI so you can allocate your budget more effectively.
- Boost Efficiency: Streamlining your recruitment process is crucial. Research shows that reducing time-to-fill by even a few days can lower your CPH significantly. Companies that automate parts of their recruitment process, such as resume screening and interview scheduling, can reduce hiring costs by up to 30%.ii This means faster hires, better talent, and reduced overhead costs.
- Stay Ahead of the Competition: The market for top talent is competitive. According to Glassdoor, companies with efficient hiring processes are twice as likelyiii to attract top candidates. By optimizing your CPH, you’re not just saving money—you’re also positioning your organization as an attractive place to work.
How Cost Per Hire Influences Overall Business Performance
One often overlooked aspect of Cost Per Hire (CPH) is its impact on broader business performance. It’s not just about the money saved in recruitment; optimizing CPH can ripple across your entire organization.
Improved Financial Health: By reducing your CPH, you can redirect those savings to other critical areas of your business, such as employee development programs or new technology investments. A survey by Deloitte revealed that companies with efficient hiring practices saw a 15% boostiv in overall productivity within the first year of implementation.
Enhanced Employer Branding: Organizations that monitor and optimize their CPH often see improvements in their employer brand. Most job seekers consider a company’s reputation before applying. If your recruitment processes are efficient, it signals that you are serious about investing in people.
Increased Retention Rates: An optimized CPH isn’t just about cost efficiency—it’s also about hiring the right talent. Companies that prioritize cost-effective, quality hires tend to have higher retention rates and are 22% lessv likely to experience high turnover in the first year.
The Hidden Costs of Recruitment
Cost Per Hire is more than just the obvious expenses like job postings or recruiter salaries. Often, it’s the hidden costs that drive up your hiring budget without you even realizing it. Here’s a breakdown of some commonly overlooked expenses:
Lost Productivity: Every day a position remains unfilled is a day where productivity is impacted. If a key role is vacant for too long, it can lead to burnout for existing employees who must take on additional tasks. Research from the Corporate Executive Board shows that the cost of lost productivity due to unfilled roles can be as high as 2%vi of a company’s annual revenue.
Onboarding and Training Costs: Even after you’ve filled a position, the costs don’t stop there. Onboarding new hires can take weeks, and the time spent training them needs to be factored into your overall CPH. According to the Aberdeen Group, effective onboarding can reduce turnover rates by 50%vii, highlighting the value of investing in a robust onboarding process.
Technology Investments: Many companies overlook the cost of the software tools used during the hiring process. Subscription fees for applicant tracking systems (ATS), background check platforms, and other recruitment technologies can quickly add up. Ensuring you’re using these tools efficiently can help reduce unnecessary spending.
Leveraging Technology and Best Practices to Optimize Cost Per Hire
To reduce CPH without compromising on quality, leverage technology and proven strategies:
- Automate Recruitment with AI: AI-powered tools can streamline candidate sourcing, resume screening, and interview scheduling, reducing hiring time by up to 30%. Automating these repetitive tasks allows your HR team to focus on strategic activities.
- Use Data Analytics for Smarter Decisions: Data analytics can identify the most cost-effective hiring channels and improve job ad targeting. According to McKinsey, companies using data-driven recruitment see a 25% boostviii in efficiency. Use analytics to refine sourcing strategies and cut unnecessary expenses.
- Centralize Hiring with an ATS: An Applicant Tracking System (ATS) can automate candidate tracking, reduce manual errors, and streamline communications. This reduces time-to-fill and ensures a more efficient hiring process.
- Build a Talent Pipeline: A robust talent pipeline allows you to fill roles quickly, reducing costs associated with vacancies. Companies with strong pipelines can reduce time-to-hire by 40%.
- Optimize Referral Programs: Employee referrals are one of the fastest and most cost-effective hiring sources. Referred candidates are 55% quickerix to hire and tend to stay longer. Implement a referral program with clear incentives to boost engagement.
By combining the latest technology with strategic best practices, companies can achieve a significant reduction in Cost Per Hire without sacrificing quality. The key is to continually analyze your processes, leverage data, and invest in tools that enhance efficiency. With these strategies, you’ll not only lower costs but also improve the quality of your hires, ultimately driving better business outcomes.
Step-by-Step Guide to Calculate Cost Per Hire
Step 1: Gather Your Data
To calculate your Cost Per Hire, you need accurate and comprehensive data. Here’s a checklist to ensure you’re covering all bases:
- Internal Costs: Include salaries of your HR staff, time spent by hiring managers in interviews, and any recruitment software subscriptions.
- External Costs: Don’t forget expenses like job board fees, background checks, agency fees, and any travel costs for candidates.
- Hidden Costs: Capture expenses related to onboarding, training, and lost productivity during vacancies.
Pro Tip: Use a centralized dashboard to track all these expenses in real-time. This will not only make your calculations more accurate but also streamline your reporting process.
Step 2: Calculate Total Costs
Break down your expenses into internal and external costs. Here’s an example breakdown:
| Expense Type | Estimated Cost ($) |
| Recruiter Salaries | $15,000 |
| Job Board Fees | $5,000 |
| Agency Fees | $10,000 |
| Onboarding | $8,000 |
| Background Checks | $2,000 |
Once you have a complete picture of your costs, you can move on to calculating your CPH.
Step 3: Determine the Number of Hires
Make sure you’re accurately counting the number of hires within the specific period you’re analyzing. For seasonal hiring, consider separating permanent hires from temporary or contract workers, as this can significantly affect your CPH.
Step 4: Plug It into the Formula
Let’s say your total recruitment costs are $120,000, and you made 30 hires::
CPH = 120,000
That means each hire costs your company $4,000—an important number to know when budgeting for the future.
Common Pitfalls to Avoid
Calculating Cost Per Hire might seem straightforward, but there are common traps that can throw off your results:
- Ignoring Hidden Costs: Don’t just track the obvious expenses. Include costs like interview time, software, and training. These can significantly affect your overall CPH.
- Inconsistent Data Collection: Be diligent about tracking costs. If different departments are hiring independently, ensure everyone is reporting expenses the same way.
- Focusing on Cost Without Considering Quality: A low CPH is great, but not if it results in low-quality hires who leave within six months. It’s about balancing cost with the quality of talent.
Real-World Case Study: Cutting Cost Per Hire
Case Study: Retail Chain’s Hiring Efficiency Boost
A major retail chain that hires thousands of seasonal employees annually faced skyrocketing recruitment costs. By implementing an automated hiring platform and negotiating better deals with job boards, they cut their Cost Per Hire from $6,000 to $3,200x in just six months. This shift not only saved them millions but also reduced time-to-hire by 40%.
Why Cost Per Hire Matters
If you’re serious about optimizing your recruiting process, understanding your Cost Per Hire is non-negotiable. It’s the difference between flying blind and having a clear roadmap for hiring efficiently and effectively. By knowing your CPH, you can make smarter budget decisions, optimize your talent acquisition strategy, and, ultimately, build a stronger team that drives your business forward.
Call to Action: Take Charge of Your Hiring Costs Today
In today’s fast-paced business landscape, understanding your Cost Per Hire is no longer optional—it’s a must. By calculating and optimizing this metric, you can streamline your recruitment process, save significant costs, and build a more resilient workforce.
However, remember that a low CPH should not come at the expense of candidate quality. The goal is to find a balance that ensures cost-efficiency while still attracting top talent who will thrive in your organization. By investing in data-driven recruitment strategies, leveraging technology, and continually analyzing your hiring metrics, you can maintain a competitive edge in the talent market.
Ready to take control of your Cost Per Hire without sacrificing quality? Applicants On Demand is a true pay-for-performance service that eliminates the guesswork regarding costs and applicant quality by delivering AI-qualified applicants directly to your ATS with zero upfront costs and pre-defined, pay-per-applicant pricing. Book a meeting today to learn more.
FAQs
How Can I Benchmark My Company’s Cost Per Hire?
Benchmarking your CPH involves comparing your data with industry standards using tools like SHRM’s benchmarking reports. Consider factors like your company’s size, industry, and location to get a realistic comparison.
What Strategies Can I Use to Reduce My Cost Per Hire Without Sacrificing Quality?
Focus on optimizing your recruitment funnel. Using AI-powered tools for candidate screening can significantly reduce costs by automating repetitive tasks. Additionally, streamlining your interview process can save time and money while maintaining quality.
How Does Cost Per Hire Correlate with Time to Fill?
Generally, a shorter time to fill reduces your CPH because vacancies are filled quicker, minimizing productivity losses. However, rushing to fill a position can lead to poor-quality hires, which can increase turnover costs.
Can High Cost Per Hire Ever Be a Good Thing?
Yes, in some cases. For specialized or high-level positions, a higher CPH can indicate that you’re investing in sourcing top-tier talent, which can ultimately lead to better long-term performance and lower turnover rates.
How Does Employer Branding Affect Cost Per Hire?
A strong employer brand can significantly reduce your CPH. Candidates are more likely to accept offers from companies with a positive reputation, which means less spending on job ads and recruitment agencies. Glassdoor reports that companies with strong employer brands see a 50% reductionxi in hiring costs.
How Can Tracking Cost Per Hire Help with Forecasting Future Hiring Needs?
Tracking your Cost Per Hire (CPH) over time not only helps you optimize current expenses but also provides a historical benchmark for future hiring projections. By analyzing trends in your CPH, you can anticipate changes in recruitment costs as your business scales or enters new markets. For instance, if your data shows that hiring for technical roles typically incurs a higher CPH, you can allocate a larger budget when planning to expand those teams. This forward-looking approach helps align your recruitment strategy with long-term business goals.
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