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Attracting and retaining top talent is key to business success, but recruitment costs must be managed efficiently. Cost per hire (CPH) is a crucial metric that helps companies track hiring expenses and optimize their recruitment strategy.
By defining and analyzing CPH, organizations can allocate resources effectively, reduce recruitment costs, and improve overall hiring efficiency.
Analyzing Cost per Hire: Key Takeaways
Cost per Hire is one of the most important recruiting metrics – Tracking CPH helps organizations assess recruitment efficiency, optimize budgets, and make data-driven hiring decisions.
Cost per hire formula: Cost per Hire (CPH) = (∑ (External Costs) + ∑ (Internal Costs)/ Total Number of Hires in a Time Period)
Internal & external recruiting costs impact CPH – Expenses such as job advertising, recruitment technology, relocation, and training costs all contribute to the overall cost per hire.
Strategic recruitment lowers hiring costs – Factors like employer branding, job ad quality, and response time can significantly reduce hiring expenses, while RPO providers help streamline the recruitment process and cut costs.
The high cost of a bad hire – A poor hiring decision can cost a company 50% to 150% of the employee’s salary, with the replacement process taking several months.
RPO Providers can optimize your recruiting budget – Leveraging specialized expertise, talent pools, and advanced recruitment tech helps lower CPH.
What is Cost per Hire?
Cost per hire definition is - It is a metric that encapsulates the total expenses an organization incurs in the process of bringing a new employee on board. The formula was standardized in 2012 by HR leaders with the involvement of The Society for Human Resource Management (SHRM) and the American National Standards Institute (ANSI).
How to calculate cost per hire?
Cost per Hire Formula
Cost per Hire (CPH) = (∑ (External Costs) + ∑ (Internal Costs)/ Total Number of Hires in a Time Period)
The result is a tangible figure that represents the average cost incurred by the organization for each successful hire.
How to Analyze Cost per Hire: Breaking Down the Components
Understanding all the components of the cost per hire provides a comprehensive picture of the financial landscape of talent acquisition. It is offering valuable insights into the web of expenses that shape recruitment strategies.
Internal Recruiting Costs
Salaries and Benefits: The time and effort invested by internal staff, including HR professionals and hiring managers, should be quantified in monetary terms. Consider the salaries, benefits, and other associated costs. For instance, the average cost of onboarding a new employee is $830 to $1000 per month. (1)
Non-labor Office Costs: Office expenses incurred while supporting the recruiting function.
Recruiting Learning and Development: Expenses related to training and development of the recruiting team.
Job Advertising: Online job boards, social media promotions, and any other channels used for job advertisements incur costs. Include expenses related to creating and posting job listings.
Technology and Software: Many organizations leverage automation technology for applicant tracking systems, recruitment software, and other tools. Include the costs associated with these technologies.
External Recruiting Costs
Job Fairs and Events: Expenses related to participating in or hosting job fairs, recruitment events, or industry conferences contribute to the overall cost.
Relocation Costs: If the position involves relocation, account for the travel and other expenses associated with moving the new hire.
Employee Referral Bonuses: Payments granted to current employees for referring a candidate who is later hired.
Travel Expenses: IIf recruitment involves travel, whether for attending job fairs or conducting interviews, these travel costs should be factored into the CPH calculation.
Agency Fees: If external recruitment agencies are used, include their fees. This often involves a percentage of the new hire's first-year base salary.
Background Checks: Verifying the background of potential hires is a common practice. Factor in the costs of background checks, pre-employment assessments, and any associated services if they are outsourced.
In addition to calculating cost per hire, certain organizations also factor in two other costs as part of their performance index.
Cost per Hire Comparable (CPHC)
This recruiting metric employs a similar methodology to CPH but focuses on a subset of data more commonly used across organizations. It proves valuable in constructing strong comparisons of costs between organizations.
Recruiting Cost Rate (RCR)
This recruitment metric establishes a formula and methodology comparing the overall cost of hiring against the total compensation of the newly hired individuals in the first year of their employment. The distinction lies in the denominator; unlike CPH or CPHC, which are ratios of costs to the number of hires, RCR is a ratio of costs to the total annual compensation of new hires during their first year.
Why is Cost per Hire Metric Important?
Financial Planning Analyzing cost per hire helps in strategic planning, providing insights into the resources required for future recruitment efforts. It allows organizations to optimize their recruiting budget and minimize unnecessary expenses.
Performance Measurement By tracking CPH over time, organizations can assess the efficiency of their recruitment processes. A decreasing CPH may indicate improvements in the hiring process or the adoption of cost-effective hiring strategies.
Benchmarking Comparing CPH against industry benchmarks and competitors provides context and helps organizations evaluate their competitiveness in attracting and hiring top talent. Additionally, it may reveal that an optimal recruiting strategy involves partnering with a Recruitment Process Outsourcing provider.
ROI Analysis CPH is integral to calculating the Return on Investment (ROI) for recruitment activities. Understanding the cost-effectiveness of different sourcing channels and strategies enables data-driven decision-making.
Strategic Decision-Making Armed with a clear understanding of CPH, organizations can make informed decisions regarding in-house versus outsourced recruitment, the utilization of specific sourcing channels, and the optimization of internal resources and their overall recruitment strategy.
What are the Challenges in Defining Cost per Hire?
Variable Costs: The inclusion of all relevant internal and external recruitment costs can be challenging due to variable expenses and the diverse nature of recruitment activities. Striking a balance between comprehensiveness and simplicity is key.
Timeframe Considerations: Choosing an appropriate timeframe for CPH calculations is crucial. Different industries and positions may have varying recruitment cycles, and a mismatched timeframe can lead to skewed results.
Optimal Approaches for Evaluating Cost per Hire Data
While cost per hire data proves invaluable for refining recruitment strategies, it is essential to adopt certain practices to maximize its effectiveness.
Regular Examination: Consistently assessing cost per hire is important for efficient process optimization, pinpointing areas for enhancement, and discerning whether cost fluctuations are favorable or unfavorable.
Holistic Cost Analysis: Instead of isolating costs, it is imperative to analyze cost per hire data not only at the organizational level but also at the departmental and positional levels to gain a comprehensive understanding.
Source Analysis: Investigating recruitment sources allows for the identification of the most effective ones. Employing a proficient HR dashboard can greatly assist in this endeavor.
Contextualization: To gain a more nuanced perspective, consider contextualizing cost per hire data with other HR metrics such as quality of hire and time-to-fill. Seek correlations to extract meaningful insights.
Key Factors Influencing Hiring Costs
Various factors significantly contribute to managing recruitment expenses. Here are some examples:
Employer Brand: A strong brand reduces the need for extensive advertising, as evidenced by a significant difference in the cost of recruitment between small and large companies. Larger brands naturally attract talent, minimizing advertising expenses.
Job Ad: Well-written job postings have the potential to draw in a higher number of qualified candidates and reduce the time needed to fill a position.
Response Time: Swift responses enhance the candidate experience and streamline the hiring process, reducing fallout in the application process. 75% of candidates assess company culture through the hiring process, so efficient engagement with candidates is what counts.
Talent Pools: Access to ready-made talent pools reduces candidate sourcing costs. Recruitment Process Outsourcing (RPO) providers excel in activating tactics to lower cost per hire.
What is the Cost of a Bad Hire?
A bad hiring decision can result in a financial impact ranging from 50% to 150% of the employee's base salary, with the process of finding a replacement taking up to several months for a company.
Employee retention and engagement significantly influence the cost per hire. Elevated turnover rates and low engagement levels can create a continual demand for new hires, subsequently increasing recruitment costs.
Defining the cost per hire is not just about crunching numbers; it's a strategic imperative for organizations aiming to enhance their recruitment processes and financial efficiency. By understanding the components, calculating costs accurately, and leveraging the insights gained, businesses can refine their hiring strategies, optimize resource allocation, and ultimately build a workforce that propels them toward success in the ever-evolving marketplace.
Another key point to remember is that your cost per hire metrics will vary depending on the specific roles you are hiring for. Consequently, the strategic decisions you formulate for specialized roles will differ.
Although the average cost per hire serves as a broad reference, it is essential to recognize it as a guiding marker. The actual cost per hire is distinctive to each organization and should be computed specifically for similar roles within that organization.
How Can RPO Reduce Cost per Hire?
Recruitment Process Outsourcing is a form of business process outsourcing (BPO) in which companies transfer all or part of their recruitment processes to external service providers.
Specialization: RPO companies specialize in sourcing, screening, and hiring. Their expertise in these areas can lead to a quicker and more efficient recruiting process, reducing the time and effort involved in hiring.
Access to Talent Pools: RPO companies typically have access to extensive labor markets, talent pools, and networks. This can result in quicker identification of suitable candidates, reducing the time-to-fill vacancies.
Technology and Tools: RPO companies often invest in advanced recruitment technologies and tools. This can lead to more efficient applicant tracking, improved candidate assessments, and candidate experience, all contributing to cost savings.
Global Reach: RPO companies with a global presence can assist in recruiting talent from different geographical locations. This can be particularly advantageous for organizations seeking diverse talent or expanding into new markets.
Continuous and Detailed Monitoring of Cost per Hire Metrics: A recruitment process outsourcing partner brings many benefits, including continuous insights into your cost per hire, preventing your business from adopting expensive practices. Additionally, you can analyze variations in cost per hire based on skills, seniority, business units, or locations, enabling you to identify opportunities for enhanced cost efficiency.
Agency Costs Savings: RPO can reduce cost per hire by leveraging economies of scale to beat the fees of external recruitment agencies.
As you explore your organization's CPH metrics, keep in mind the significance of context, specialization, and ongoing monitoring. These insights serve as valuable tools in your quest to drive talent acquisition success. If you need a partner to refine your recruitment strategy and optimize your cost per hire, contact us here.
Cost per Hire: Frequently Asked Questions
What is the cost per hire?
Cost per hire (CPH) is a key recruitment metric that measures the average cost incurred by a company to attract and hire a new employee. This metric encompasses both internal and external costs associated with the recruitment process, including salaries of the recruitment team, advertising expenses, job board fees, relocation expenses, and administrative costs. Understanding the average cost per hire is essential for evaluating the effectiveness of hiring strategies and managing the recruitment budget effectively.
How much does it cost a company to hire someone?
The average cost to hire an employee can vary widely depending on several factors, such as the industry and the specific role. According to recent USA data, the overall average cost to recruit an employee is approximately $4,700, while executive positions can exceed $28,000.
In the UK, the average recruitment cost for a mid-level employee is estimated at £6,998, or around 20% to 30% of the annual salary. In other parts of Europe, companies spend 10% to 30% of the new hire’s first-year salary on recruitment, which can be a lot if they recruit in developed regions like Scandinavia, Western Europe, etc.
What is the formula for calculating cost per hire?
The standard formula for calculating cost per hire is:
Cost per Hire (CPH) = (∑ (External Costs) + ∑ (Internal Costs)/ Total Number of Hires in a Time Period)
This formula allows organizations to sum all relevant costs associated with hiring over a specified time frame, such as salaries, interview costs, advertising costs, job board fees, and additional costs — and divide that total by the number of hires made during that period. This calculation helps assess recruitment metrics and optimize the recruiting budget.
What is CPH in HR?
In human resources (HR), CPH stands for cost per hire. It serves as an important metric for evaluating the efficiency of the recruiting process. By analyzing CPH, HR professionals can identify common costs associated with hiring, assess whether they are meeting industry averages, and make informed decisions about resource allocation within their recruitment budget. Understanding cost per hire will help in benchmarking against competitors and refining hiring strategies to improve overall recruitment effectiveness.
What is the average onboarding cost for a new employee?
The average onboarding cost per employee ranges from $830 to $1,000 per month, according to the latest data. For organizations with extensive onboarding requirements, this can represent a significant investment.
What are soft recruitment costs?
Recruiting and talent acquisition requires substantial time, effort, and investment. However, many companies struggle to calculate the real costs accurately - especially soft costs, which experts say can be twice as high as hard costs.
Soft costs, such as the time spent by managers and department heads on hiring, often go unnoticed but significantly impact recruitment budgets.
To develop a cost-effective hiring strategy, businesses must ensure true costs transparency, minimizing or eliminating extra costs. Outsourcing recruitment provides a clear, performance-based pricing model, allowing for predictable and controlled cost per hire.
Dora Domosi is a Senior HR Sourcing Consultant at Serendi
Sources:
1. Leena AI