How to Calculate Cost per Hire

In the competitive landscape of recruitment and hiring, understanding the cost involved in hiring new employees is crucial for businesses, especially in these big tech layoffs and cost-cutting times.

Calculating the cost per hire allows organizations to assess and optimize their hiring processes, budget effectively, and make informed decisions.

This article will provide an overview of how to calculate the cost per hire, including its definition, factors affecting it, calculation methods, and its importance in the recruitment process.

Definition of Cost per Hire

Cost per hire refers to the total cost incurred by an organization to fill a vacant position with a new employee. It encompasses all expenses associated with attracting, evaluating, and onboarding a candidate. These costs can include recruitment advertising, agency fees, background checks, pre-employment assessments, interviews, relocation assistance, and employee orientation programs.

Factors Affecting Cost per Hire

Several factors influence the cost per hire for an organization. Understanding these factors helps identify areas where costs can be optimized. Some key factors include:

1. Recruitment Channels: The selection of recruitment channels, such as job boards, social media platforms, or recruitment agencies, can impact the cost per hire. Different channels have varying associated costs.
2. Time to Fill: The duration it takes to fill a position affects the cost per hire. Longer hiring processes can result in increased expenses, such as extended job postings or additional rounds of interviews.
3. Candidate Quality: The quality of candidates attracted and hired impacts the cost per hire. Hiring top talent may involve higher compensation packages or relocation expenses.
4. Geographical Factors: The location of the position and the organization’s geographical scope can influence the cost per hire. Recruiting in areas with a higher cost of living or limited talent pools may increase expenses.

Direct Costs vs. Indirect Costs

When calculating the cost per hire, it’s essential to differentiate between direct costs and indirect costs. Direct costs are directly attributable to the hiring process and can be easily quantified. These include expenses like advertising fees, recruitment agency fees, and background checks. Indirect costs, on the other hand, are not directly linked to a specific hire but contribute to the overall cost per hire. Examples of indirect costs include internal HR staff salaries, technology infrastructure, and employee referral bonuses.

Calculation Methods for Cost per Hire

Various calculation methods exist for determining the cost per hire. Organizations can choose the method that aligns best with their specific requirements and resources. Some commonly used methods include:

2. Total Cost Method: This method involves summing up all the direct and indirect costs associated with the hiring process over a specific period.
3. Standardized Cost Method: The standardized cost method assigns a standard cost to each component of the hiring process. These costs are predetermined based on industry averages or internal benchmarks.
4. Activity-Based Costing Method: Activity-based costing involves breaking down the hiring process into various activities or tasks and assigning costs to each activity. This method provides a more detailed and accurate assessment of the cost per hire.

Cost per Hire Formula

To calculate the cost per hire, organizations can use the following formula:

Cost per Hire = Total Recruiting Costs / Number of Hires

The total recruiting costs include both direct and indirect expenses incurred during the hiring process. By dividing this total by the number of hires, organizations can determine the average cost per hire.

Example Calculation

Let’s consider an example to illustrate the calculation of cost per hire. Company XYZ incurred the following expenses during their hiring process:

• Advertising fees: $1,000
• Recruitment agency fees: $3,000
• Background checks: $500
• HR staff salaries: $4,000
• Employee referral bonuses: $1,500

During the specified period, Company XYZ hired 10 new employees.

Total recruiting costs = $1,000 + $3,000 + $500 + $4,000 + $1,500 = $10,000

Cost per Hire = $10,000 / 10 = $1,000

Therefore, the cost per hire for Company XYZ in this example is $1,000.

Importance of Calculating Cost per Hire

Calculating the cost per hire offers several benefits to organizations:

1. Budget Optimization: Understanding the cost per hire helps organizations allocate their recruitment budgets more effectively. It enables them to identify areas where costs can be reduced or reallocated to maximize the return on investment.
2. Process Improvement: By analyzing the cost per hire, organizations can identify inefficiencies or bottlenecks in their hiring processes. This insight allows them to streamline and optimize their recruitment strategies.
3. Performance Evaluation: Tracking the cost per hire over time provides organizations with a metric to evaluate the success of their recruitment efforts. It helps determine the effectiveness of different recruitment channels, strategies, or initiatives.

Benefits of Tracking Cost per Hire

Tracking the cost per hire provides additional advantages to organizations:

1. Data-Driven Decision Making: By consistently monitoring and analyzing the cost per hire, organizations can make data-driven decisions regarding their recruitment strategies and budget allocations.
2. Identifying Costly Trends: Tracking the cost per hire allows organizations to identify trends or patterns that may contribute to higher hiring costs. This insight helps them take proactive measures to address and mitigate these factors.
3. Comparative Analysis: Benchmarking the cost per hire against industry averages or competitors provides organizations with valuable insights into their cost competitiveness and allows them to set realistic targets.

Challenges in Calculating Cost per Hire

While calculating the cost per hire offers significant benefits, several challenges may arise:

1. Data Accuracy: Gathering accurate data on all the direct and indirect costs associated with the hiring process can be challenging. Organizations need to ensure comprehensive data collection to avoid underestimating or omitting expenses.
2. Attribution of Indirect Costs: Assigning indirect costs to specific hires may be complex. Developing a methodology to allocate these costs fairly and consistently is essential for accurate calculations.
3. Dynamic Nature of Costs: The cost per hire can vary over time due to factors such as changes in recruitment strategies, inflation, or economic conditions. Regularly reviewing and updating cost calculations is necessary for maintaining accuracy.

Best Practices for Accurate Cost per Hire Calculation

To enhance the accuracy of cost-per-hire calculations, organizations can follow these best practices:

1. Comprehensive Data Collection: Ensure that all direct and indirect costs associated with the hiring process are accounted for. Maintain detailed records of expenses, including recruitment fees, advertising costs, background checks, and HR staff salaries.
2. Consistent Cost Allocation: Develop a standardized methodology for allocating indirect costs to specific hires. This ensures fairness and consistency in cost calculations.
3. Regular Review and Update: Periodically review and update cost-per-hire calculations to account for changes in recruitment strategies, inflation, and other relevant factors. This helps maintain accuracy and relevance in cost assessments.
4. Automation and Technology: Leverage technology and automated systems to streamline data collection and calculation processes. Utilize applicant tracking systems (ATS) or recruitment software that can generate accurate cost-per-hire reports.
5. Benchmarking and Comparison: Compare the cost per hire against industry benchmarks or competitors’ averages to gain insights into the organization’s cost competitiveness. This information can guide decision-making and highlight areas for improvement.

Cost per Hire Benchmarks

Benchmarking the cost per hire provides organizations with reference points to assess their recruitment costs. While benchmarks can vary across industries and locations, they offer valuable insights into cost-effectiveness. Industry studies, surveys, and reports provide benchmarks based on factors like company size, position level, and geographic location. By comparing their cost per hire against these benchmarks, organizations can identify areas for optimization.

Cost per Hire Metrics

Tracking and analyzing specific cost-per-hire metrics can provide organizations with valuable insights. Some key metrics include:

1. Cost per Hire by Source: Calculate the cost per hire for each recruitment source, such as job boards, career fairs, or employee referrals. This helps determine the most cost-effective channels.
2. Time to Fill: Monitor the time it takes to fill a position and analyze its correlation with the cost per hire. Longer time to fill can increase costs, highlighting the need for process improvements.
3. Cost per Hire by Department: Assess the cost per hire for different departments within the organization. This analysis can uncover areas where costs may be higher or lower due to varying recruitment strategies or candidate profiles.

Cost per Hire Analysis

Analyzing cost-per-hire data can provide valuable insights for decision-making and process improvement. Some analysis techniques include:

1. Trend Analysis: Identify trends in cost per hire over time. Look for patterns, such as seasonal fluctuations or changes in recruitment strategies, to optimize costs.
2. Correlation Analysis: Evaluate the relationship between cost per hire and other key metrics, such as employee retention rates or performance metrics. This analysis can uncover correlations that guide cost optimization strategies.
3. Scenario Analysis: Conduct scenario analyses to assess the impact of changes in recruitment strategies or cost-saving initiatives on the cost per hire. This helps organizations make informed decisions based on potential outcomes.

Conclusion

Calculating the cost per hire is essential for organizations to understand and optimize their recruitment expenses. By considering factors such as direct and indirect costs, calculation methods, and benchmarking, organizations can make data-driven decisions, improve their recruitment processes, and allocate budgets more effectively. Accurate cost per hire calculations provide valuable insights into the effectiveness of recruitment strategies and contribute to overall business success.

FAQs

Q1: Why is calculating the cost per hire important?

Calculating the cost per hire is important because it allows organizations to assess and optimize their recruitment expenses, allocate budgets effectively, and make informed decisions regarding their hiring processes.

Q2: What are direct costs and indirect costs in the context of cost per hire?

Direct costs are expenses directly attributable to the hiring process, such as recruitment fees, advertising costs, and background checks. Indirect costs are not directly linked to a specific hire but contribute to the overall cost per hire, including items like HR staff salaries, technology infrastructure, and employee referral bonuses.

Q3: How can organizations optimize their cost per hire?

Organizations can optimize their cost per hire by implementing best practices such as comprehensive data collection, consistent cost allocation, regular review and updates, leveraging automation and technology, benchmarking against industry averages, and analyzing key cost per hire metrics. These strategies help identify areas for improvement and make informed decisions to optimize costs.

Q4: Are there industry benchmarks for cost per hire?

Yes, industry benchmarks for cost per hire exist and can vary based on factors like company size, position level, and geographic location. Industry studies, surveys, and reports provide valuable benchmarks that organizations can use to assess their cost competitiveness and set realistic targets.