Understanding Cost per Hire

When it comes to hiring new employees, most companies look at the bottom line. How much will it cost to find, recruit, and onboard new team members? Knowing your cost per hire tells you how much you're investing to bring in new talent. Read on as this article uncovers what this metric means, why it's important, and how to calculate it for your business.

What Is Cost Per Hire?

Cost per hire (CPH) is a crucial metric for companies to track. It measures the total amount spent hiring a new employee, including both internal expenses and external costs. Internal costs for hiring include recruiter salaries and benefits, employee referral bonuses, and recruitment software expenses. They also cover costs for in-house recruiting events and training programs.

External costs include advertising fees, payments to recruitment agencies, and background check expenses.  Travel costs for candidates and recruiters, and assessment tool expenses are part of this as well.

Why It Matters

Knowing your cost per hire is essential for budgeting and helps ensure you allocate sufficient funds for recruitment needs. Tracking this metric over time helps determine ways to streamline hiring and cut costs.

An efficient process with a low cost per hire means you get more bang for your buck on talent acquisition. Excessive costs can indicate issues such as high turnover rates or inefficient recruiting practices.

Calculating Your Cost Per Hire

Understanding CPH helps set and maintain a recruitment budget. Budgeting ensures that the company does not overspend. Here's a guide on how to calculate your cost for hire:

The Calculation Formula

To calculate your cost per hire, simply divide your total recruitment costs (internal and external) by the number of hires made during that period. The formula looks like this:

Total Recruitment Costs / Number of Hires = Cost Per Hire

Tracking Recruitment Costs

When tracking recruitment costs, include typical expenses—job board fees, recruiter costs, advertising spends, applicant screening, relocation expenses, and training and onboarding costs. Having an applicant tracking system can greatly simplify gathering this data. With a system, you can centralize all recruitment activities in one place for easy cost monitoring.

Analyze and Optimize

Once you know your cost per hire, benchmark it against industry standards for your region and company size. Higher than average costs may signal inefficient processes that need optimization. Look for ways to streamline candidate sourcing, screening, and hiring. Even small improvements can lead to significant cost savings when scaling hiring.

Benchmarking Your Cost Per Hire Against Industry Standards

Benchmarking your cost per hire means comparing your hiring costs to those of similar companies. This helps you see whether you're spending too much or whether your hiring process is efficient. To do this, collect your recruitment expenses and compare them to industry averages. Here's how:

Know The Averages

Being aware of the average cost per hire for your industry is crucial as it gives you a baseline to measure your own recruiting costs against. Most studies find the average cost per hire in the U.S. falls between $4,000 - $6,000. But this can vary significantly based on role, industry, location, and company size.

Factor In Your Variables

There are many variables that impact your specific cost per hire metric—company size, industry, roles being hired for, recruitment channels used, and location all play a big part. For example, hiring software engineers in San Francisco will cost far more than hiring retail workers in rural Iowa.

Identify Benchmarks

Look for cost per hire benchmarks or studies focused on companies like yours. Industry reports, salary surveys, and HR publications often break down averages by criteria. This includes company revenue/employee count, geographic region, and job function or department. Find the most relevant benchmarks to accurately assess whether your costs are in line with peers. Comparing apples-to-apples is the key.

Analyze & Optimize

Once you have benchmarks, check how your numbers compare. If costs are higher, figure out what's causing that. Consider changing your recruitment process. You can renegotiate vendor contracts as well or adjust how you find talent. It's important to keep improving to stay efficient and competitive.

Ways to Reduce Your Cost Per Hire

Companies invest in hiring top talents. And with the right strategies in place, you can reduce your cost for hire. Here's how:

Optimize Job Postings

Writing clear, concise job descriptions and posting them on the right platforms is crucial. Vague listings lead to more unqualified applicants, increasing screening time and costs. Be specific about requirements, responsibilities, and company culture fit.

Streamline the Hiring Process

A long, complicated hiring process increases costs and discourages candidates. Look for inefficiencies, such as extra interviews or approvals. Use technology to automate scheduling, assessments, and communication. ATS or applicant tracking systems help with streamlining your hiring process. Faster, clearer processes ensure that the candidates have better experience.

Promote From Within

Hiring external candidates is expensive due to recruitment costs, onboarding, and training. Promoting current employees utilizes existing resources and familiar cultural fits. Invest in professional development to cultivate an internal talent pipeline.

Partner With Schools and Organizations

Building relationships with colleges, trade programs, and community organizations is also a good move. This gives companies early access to emerging talent pools. Sponsoring events, offering internships, or joining career fairs helps companies find skilled candidates affordably. It's a proactive way to improve hiring and build a strong talent pipeline while connecting with the community.

Leverage Social Media

Social media platforms make recruitment more accessible, efficient, and affordable. Utilize social media sites to share job openings and source passive candidates. Building an active social media presence showcases your employer brand and company culture. This attracts qualified applicants and boosts referrals.

By following these simple tips, companies can cut hiring costs. The key is to align recruiting efforts with long-term workforce planning.

Conclusion

Calculating cost per hire is a crucial part of any hiring process. Understanding how to calculate cost per hire seems tricky at first, but it’s worth investing your time and effort. Once you get a hold of the essential factors, your numbers will be spot-on. By using the right formulas and comparing them to industry standards, you can see how well your hiring process is working.

Whether you're a seasoned HR pro or just getting into it, this guide explains everything you need to know in simple terms. Take the first step toward smarter, data-driven hiring by getting clear on cost per hire.

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