Cost per Hire
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What Is Cost Per Hire?
Cost Per Hire (CPH) is one of several metrics used to determine the success of your hiring process.
Specifically, Cost Per Hire refers to the total recruiting cost of hiring one individual to the company. The formula to determine CPH is your internal recruiting costs plus external recruiting costs, divided by the total number of hires over a specified time frame.
Why Is Measuring Cost Per Hire Important?
Cost Per Hire can bring much-needed clarity to HR practices. It can help you benchmark your business in comparison to others, build a budget, forecast, and provide an in-depth understanding of how effective your recruitment process is.
- Benchmarking against other companies. Calculating CPH and being aware of the average cost across other companies shows you how your organization compares. Understanding your costs in comparison to others can help you determine if you are spending too much, or could reasonably spend more, on recruiting.
- HR budgeting. Understanding your CPH is a step toward being able to build a comprehensive HR budget. If you are struggling to recruit talent and find that your CPH is very low, then it may be worth increasing the recruiting budget. Alternatively, if you are spending an excessive amount, it’s an area that you may be able to pull from to support other areas without losing effectiveness in the recruiting process.
- Understanding your recruiting process. Breaking down the external and internal costs allows you to understand where your money is going. Perhaps you can find redundancies in the work being done, gaps in certain areas of the process, or a resource that is being paid for but underutilized. You will also learn what you are relying on the most as well as what yields the preferred results.
- Evaluate the recruitment strategy. Using the information obtained above, you can identify opportunities to reduce the cost per hire and increase the effectiveness of your recruitment.
How to Calculate Cost Per Hire
Let’s explore the process of calculating CPH.
Step 1: Determine the Time Period
For what time period are you collecting data? There is not one right answer; it depends on why you are collecting this information and how you are planning to use it. Common time frames include monthly, quarterly, and annually, but you are not limited to one of these specifically.
Step 2: Calculate Internal Recruiting Costs
There are a lot of different ways that recruiting can incur internal costs, even down to the time that managers spend reviewing resumes and sitting in interviews. When calculating these costs, limit them to the costs during the time period previously determined. Some specific examples include:
- Cost of internal recruiting staff: salary and benefits
- Cost of sourcing candidates: advertising or cost of resume mining
- Time and dollars spent on government compliance, such as EEO, Affirmative Action, Office of Federal Contract Compliance Programs (OFCCP), or other new-hire reporting
- Training for recruiters or recruiting staff
- Managers’ time for recruiting activities, including salary and benefits
Step 3: Calculate External Recruiting Costs
Some of the costs stated above as internal expenses may be outsourced and become external. Some examples of those and other external recruiting costs include:
- Cost of job ads, postings, sourcing
- Background, drug, or other pre-employment screening fees
- Campus recruiting or job fair costs
- Wages of temporary workers
- Employee-referral awards
- Sign-on bonuses
- Immigration-related expenses, such as employment visas and associated legal fees
- Temporary staffing agency fees
- Outsourced recruiting fees (headhunters, direct-hire placement)
- Employee relocation services
- Travel for candidate(s), if applicable
- Travel for recruiter(s), if applicable
- Cost of recruitment technology
Step 4: Review Total Number of Hires
How many new hires did you have for the specified time period? Don’t forget to include any employees who were hired during the specified time period but have since left.
Step 5: Run the Formula
Once you have all of the data (internal and external recruiting costs, the total number of hires, and have determined the time range) you can plug those numbers into the formula to determine your company’s Cost Per Hire.
(Internal Recruiting Costs + External Recruiting Costs) ÷ Total Number of Hires In a Specific Period of Time
Example:, we will use the time period of one quarter. During that time, the company spent $8,000 on internal costs and $9,000 on external costs ($17,000 total). They hired three employees during that time period.
$17,000 ÷ 3 = $5,667 per hire
Based on the benchmarking report for the year of this writing, which is around $4,500, this indicates that the company likely has an opportunity to increase their hiring effectiveness. They should evaluate both internal and external costs to ensure they are using both as effectively as possible.
How to Use Your Cost Per Hire Number
Cost per hire is an inherently important metric because of the ways in which it can be used in budgeting, recruitment strategy, and benchmarking.
Include CPH when you are building your budget to indicate areas where you may be falling short. For example, if you are struggling to attract talent and find that your CPH is low, it may be worth increasing the recruiting portion of the HR budget to dedicate additional resources to sourcing candidates and hiring.
Using CPH in conjunction with other recruiting metrics and data, you can build a recruiting strategy for your business. The role of the CPH is to help identify how resources are being used and their relative cost. You may find that you are spending a significant amount on external recruiting fees, but that it isn’t very effective for the cost. As a result, you may choose to dedicate more internal resources and reduce external costs while maintaining the same level of productivity. Alternatively, you may find that it’s better for your business to focus on internal candidates as opposed to outside candidates, and you can realign your recruiting process accordingly.
It’s important to understand how your practices and their effectiveness compare to other businesses of similar size and industry. This allows you to understand how your business is performing and what opportunities or challenges you face that you can adjust your strategy for. You can usually find the average cost per hire in a survey done by the Society of Human Resource Management or other reputable HR resource. Look at the two side by side and begin to determine what your strengths and weaknesses are in comparison.
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Colleen manages a team of HR consultants that work with a variety of industries, specializing in the fields of human resources, strategic planning, and human capital management. Colleen applies expert knowledge, industry experience, and relentless energy to solving companies’ issues. She is a member of the Society for Human Resource Management as well as women in leadership groups. She is PHR, SPHR, and SHRM-SCP certified. She has an awesome pet cat, Attila and, when she’s not working she loves to travel, enjoy the great outdoors, and volunteer with different local charities.
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