Cost-per-hire guide: definition, calculations, and strategies to reduce cost-per-hire
In the United States, an average of 15% of an organization’s human resources budget is allocated toward recruitment, and the average cost per hire is usually over $4,000. The Society for Human Resource Management (SHRM) conducted a survey which indicated that the average cost to hire an employee is $4,129, while the average time it takes to fill a given position is 42 days. Similarly, Deloitte’s Talent Acquisition Factbook findings indicate that the average cost of hire in the U.S. is $4,000 and can take up to 52 days to fill an open position.
Cost per hire differs between levels of hiring as well. While it will only cost about 20% of an employee’s salary to hire entry-level recruits, the cost per hire for mid to senior-level and executive-level employees will be a lot higher. Data shows that hiring mid-level employees can cost an organization up to $60,000. Executive-level employees, on the other hand, can cost an organization more than 200% of the salary given to an existing executive-level employee.
For any organization, expenses on talent pools is considered an investment. That is why most organizations will consider quantifying the investment amount to analyze and strategize making the most of a hiring process. With hiring becoming significantly expensive in recent” years, it is important to understand how to control and reduce cost per hire. In this comprehensive guide to understanding cost per hire, we cover the definition of cost per hire; metrics associated with cost per hire; the significance of cost per hire; how to calculate cost per hire and strategies that will help organizations reduce cost per hire.
Cost-per-hire is an efficiency metric and it measures the cost a company spends to hire new employees. It is a recruitment metric designed to measure the cost-effectiveness of the hiring process and it is used to evaluate and compare hiring expenses.
What is the objective behind calculating cost-per-hire?
“In an ideal world you need to hire the best available talent for the least cost in the shortest time period.
Is calculating cost per hire necessary? Let’s understand the advantages and disadvantages of calculating cost per hire.
The advantages of calculating the cost of hiring
Budgeting becomes easier by calculating the cost of hire.
By calculating internal and external costs of hiring, human resource teams can not only create budgets but also help them stay within said budgets while hiring. It also helps recruiting teams create budget forecasts for future recruiting processes.
KPI and benchmark setting for recruitment teams
Cost per hire is an important key performance metric for recruitment teams. It also helps set a benchmark for closing hires. With specific benchmarks in place, recruitment teams can compare their year-on-year progress and keep track of industry averages.
Optimizing recruitment expenses
By calculating the cost of hiring, recruitment teams can analyze the insights gained from the exercise and optimize recruiting expenses over time and possibly reduce inefficiencies and discrepancies in the hiring process.
The disadvantages of calculating the cost of hiring
Cost takes precedence over quality
If cost becomes the only underlying factor in determining the recruitment strategy, there will be a likely possibility of a dip in the quality of hire. So, while cost per hire is an important KPI, it should not be the only factor contributing to an organization’s recruiting strategy.
Recruiting processes can become twice as long
When an organization operates with the sole objective of cutting costs, it is unlikely to invest in elements like applicant tracking systems, paid advertising, and hiring recruiting consultants to help with the hiring process. This in turn is likely to increase the time taken to hire new talent. It also means that the recruiting teams will need to manually sort through applications (increasing the risk of human error and assessor bias) and ultimately leading to a waste of time and effort.
Parameters that contribute to cost-per-hire
Two important parameters that contribute to cost-per-hire for any organization are external and internal costs. A third parameter in this calculation refers to the number of successful hires. Let’s understand each of these parameters.
External costs refer to costs borne by an organization for any external costs incurred in the recruitment process. Some examples of external costs are as follows –
- Expenses of participating in job fairs and recruitment events including participation fees, booth fees, equipment rental, promotional and marketing collaterals etc.
- Sometimes organizations send human resource personnel for conducting campus interviews – the cost of travel and stay of the recruiters is also considered as external costs. Similarly, organizations might bear the cost of flying and accommodation of a potential candidate for an interview.
- Consultation fees also become a part of external costs – this refers to organizations hiring recruitment consultants and recruiting agencies to help them with the hiring process.
- External costs also include the cost of using technology to optimize the recruiting process. This can refer to employing Applicant Tracking Systems and AI recruitment systems to enhance recruitment efforts.
- Organizations also spend on advertising on job boards, social networks, recruitment platforms etc.
Internal costs refer to costs borne by an organization for internal expenses that might be incurred during the recruitment process. Her examples of internal costs are as follows –
- Salaries of recruiting staff, incentives, and benefits given to talent acquisition teams count as internal costs in the recruitment process.
- Any fixed costs associated with the human resources department including rent or any capital expenses will be counted as internal costs.
- The expense of designing and developing talent programs is also a part of the internal cost.
- Some organizations tend to take into account the number of interview hours taken to recruit a potential candidate. These hours are multiplied by the hourly salary of the recruiter in charge of the interview process.
Number of successful hires
The total number of successful hires can vary between organizations as each can have its own benchmark for what constitutes a successful hire. Some organizations might consider internal promotions and placements, some might even consider contract workers, interns and freelance consultants as a part of the number of hires in a specific time period. Some organizations might even consider a successful hire as one that completes a specific amount of time within the organization.
How to calculate cost-per-hire
Calculating cost-per-hire is easy and can be done by following a simple mathematical formula.
In layman’s terms, to calculate the cost per hire, one usually needs to average the amount spent during a specific hiring period and divide it by the number of successful hires in the same time period. Let’s give you an example. If an organization hires 50 people in its recruiting period and spends $100,000 in that time period as hiring costs, then the average cost-per-hire will be $2,000.
Apart from calculating cost-per-hire, some organizations also calculate two other costs as a part of their performance index. Let’s quickly understand these costs.
Cost Per Hire Comparable (CPHC)
Cost per hire comparable is similar to cost-per-hire. Even though it uses the same formula, it tends use different data sets to calculate internal and external costs. For instance, an organization that might constantly hire talent from other countries might be required to pay visa and relocation fees. This data set can emerge as a pattern and if the organization might be trying to reduce their cost per hire, they are likely to focus on reducing this cost by hiring locally.
Recruiting Cost Rate (RCR)
Recruiting cost rate refers to the percentage of expenses divided by the compensation paid to the new hires in their first year of employment.
The formula to calculate RCR is as follows:
RCR = total internal and external hiring costs/total annual compensation of the new hires in the 1st year multiplied by 100.
The last three years have been a rollercoaster ride for organizations with disruptions at literally every touchpoint of operations, the highest rates of inflation the world has seen in forty years and an economic meltdown resulting in the tightening of purse strings everywhere. With budgets being slashed down to almost nothing, every department, including human resources, is looking to make the most of their sharply depleted funding. This obviously calls for a significantly low cost-per-hire. Now that we have taken you through the fundamentals of calculating cost-per-hire, let’s deep dive into strategies that can help reduce the cost of hiring.
Strategies to reduce cost-per-hire
Designing and developing talent pipelines well in advance
Building a talent community of skilled and qualified candidates can bring about a world of difference in the cost-per-hire rate of an organization. By building a talent community, talent acquisition teams can scout for eligible recruits at any point of the recruitment process.
A talent community can be easily built by adding eligible candidates to a candidate database – this allows talent acquisition teams to consider candidates for future positions from existing resources instead of outsourcing the recruitment to external parties. Talent pipelines also reduce the cost of advertising on job boards or employing recruitment consultants. Another significant save from building a talent community is the time factor. An existing candidate database will significantly reduce the time taken to hire a new recruit.
Employing AI and machine learning systems to streamline hiring
Recruiters can help minimize the cost of hiring by ensuring they hire a suitable candidate from the get-go. This is because replacing a bad hire can be even more expensive. By using AI and machine learning systems, recruiters can automate quite a few aspects of the hiring process including searching, sorting, scheduling interviews, test assessments and evaluations and even managing rolling out of offer letters and onboarding.
Social media platforms offer excellent opportunities for hunting suitable candidates. Recruiters can use the organization’s page to share information about existing opportunities. They can also tap into employee advocacy by having their employees share information on open positions.
Boosting internal recruiting and referrals
According to a LinkedIn report, internal recruiting improves retention by 81%, accelerates the new hire productivity by 69% and the hiring process by 63%. By rolling out an employee referral scheme, recruiters can get their own employees to help with the hunt for a suitable candidate. While there is the added expense of a referral bonus, said cost is significantly lower than actual hiring costs. Recruiters can also create an internal job board providing existing employees an opportunity for horizontal growth.
Improve recruitment process by launching a careers microsite
An excellent way to reduce cost-per-hire is by setting up a microsite to advertise existing opportunities. By launching a careers page or a microsite, organizations can publicly advertise open opportunities for a very reasonable expense. A careers site offers better credibility and authority and has more people interested in applying to opportunities. It also helps cut down on advertising costs that would otherwise be spent on job boards and other career websites.
Have your employees speak for you
Employees can be a powerful influence for establishing an organization’s credibility. Because of the number of job scams being reported, job seekers tend to be very careful before sharing their information with organizations as well as career search platforms. But by using your own employees to promote opportunities by sharing and commenting on job posts for better reach can advocate their trust in the organization. This will also reduce the drop out rate – thereby curbing an important factor contributing to cost-per-hire.
Calculating your cost per hire helps you optimize your recruitment budget and recruiting process as a whole. Make sure to keep track of your internal and external expenses to get an accurate overview of costs per hire at your organization. A one-size-fits-all approach does not work when calculating cost per hire, as it is essential to take into consideration many variables, including the role being recruited for, the demand for the talent, and the size of an organization.
If you want to reduce your cost per hire, you can explore comprehensive AI recruiting tools like Arya that can speed up various recruitment tasks and help make informed hiring decisions. To see how, request a demo today!
What CPH means?
CPH stands for Cost Per Hire. It is a measure of the total cost of recruiting and hiring a new employee divided by the number of hires made during a specific period.
How to calculate CPH?
To calculate CPH, you can use the following Cost per Hire Formula is:
CPH = (Total cost of recruiting and hiring * 100) / Number of hires made
Why does cost per hire matter?
Cost per hire matters because it helps companies understand the financial impact of their recruiting and hiring processes.
Cost of Hire vs Cost per Hire?
The cost of hire is the total amount of money that a company spends on recruiting and hiring a new employee, while the cost per hire is the average amount of money that a company spends on recruiting and hiring a new employee divided by the number of hires made during a specific period.
How do you calculate cost to hire?
To calculate the cost to hire, you need to add up all the costs associated with the hiring process, including advertising, recruitment agency fees, and background checks.
Does it cost more to hire a new employee than their salary?
It depends on various factors like role, effort, tools used etc. However, in general, it’s noted that the cost to hire a new employee is more than their salary.
What is the cost of a bad hire?
Objectively speaking, the cost of a bad hire can be significant and may include several factors, such as recruitment costs, salary and benefits paid to the employee, costs associated with training and development, lost productivity, and potential legal expenses related to termination.
Additionally, a bad hire can impact team morale and customer satisfaction, potentially leading to decreased revenue and damage to the company’s reputation.
What is the average cost per hire in the US?
The average cost per hire in the US is $4,129. However, this number can vary significantly depending on the industry, the size of the company, and the specific hiring process.
What is the average cost per hire in 2023?
The average cost per hire in 2023 is expected to be $4,200. However, this number can vary significantly depending on the industry, the size of the company, and the specific hiring process.
What is a reasonable cost per hire?
There is no one-size-fits-all answer to this question, as the reasonable cost per hire will vary depending on the industry, the size of the company, and the specific hiring process. However, a reasonable cost per hire should be in line with the average cost per hire for the industry and the size of the company.