How to Calculate Cost Per Hire: A Guide

In today's competitive labor market, every recruitment decision must be strategic, data-driven, and financially prudent. Whether you're a small business or a large corporation, knowing how to calculate cost per hire is critical for managing your recruitment budget, improving your recruitment strategy, and ensuring the overall effectiveness of your human resource management efforts.

Companies are increasingly investing in recruitment technologies, employee referrals, and external recruitment agencies, making it critical to track and improve key metrics such as cost per hire.

This guide explains the meaning, importance, and methodology of cost per hire, including a detailed breakdown of the cost per hire formula and a step-by-step process for applying it. Knowing your organization's hiring costs is critical for smart strategic planning, whether you're analyzing internal and external costs or aligning with industry benchmarks.

What is cost per hire?

The total cost of hiring a new employee is measured by the human resources metric known as "cost per hire." This covers both internal costs and external recruiting costs incurred during the recruitment process over a specified time period. These expenses frequently include job board fees, interview costs, recruitment technology, relocation expenses, recruiting team salaries, and fees paid to external vendors or external recruitment agencies.

The purpose of calculating cost per hire is to assess the cost effectiveness of your entire recruiting process. It assists in determining where resources are being used efficiently and where you could reduce costs or improve your recruitment channels.

This metric helps clarify the total organizational costs of hiring someone new, whether you're working with internal staff or external hires. It is part of the standard set of recruiting metrics that organizations use to evaluate performance.

Organizations need new hire pay practice consulting to ensure their cost per hire aligns with competitive market rates, helping avoid overspending or underpaying in talent acquisition. By leveraging data-driven insights into candidate decisions and market benchmarks, companies can optimize hiring costs while attracting top talent effectively.

Why is measuring cost per hire important?

Cost per hire allows organizations to better understand the financial investment required for new hires, resulting in more effective recruitment strategy development and process improvement. It provides human resources teams with the data they need to compare costs across departments, roles, or locations, as well as setting hire benchmarks against industry averages.

It also enables organizations to better manage their recruiting budget, particularly if they hire regularly or heavily rely on temporary staff or fixed-term contracts. For example, if your recruiting costs are significantly higher than industry benchmarks, this may indicate inefficiencies in your recruitment function or excessive use of costly external recruitment agencies. On the other hand, if your costs are low but turnover is high, your recruitment efforts may jeopardize quality.

Tracking this metric also allows for a more strategic value of your variable pay programs, development costs, and determining the value of various recruitment channels, such as job boards versus employee referrals. Furthermore, it encourages employers to promote employee referrals through a more cost-effective channel.

Finally, understanding cost per hire enables organizations to make more informed hiring decisions and adjust recruitment teams, workflows, and resource allocation accordingly.

Cost Per Hire Formula

The standard cost per hire formula is:

Cost per Hire = (Internal Recruiting Costs + External Recruiting Costs) ÷ Total Number of Hires

• Internal recruiting costs: These include internal expenses such as salaries of the hiring manager, recruiter salaries, time spent by internal staff on interviews, and recruitment technology platforms used.

• External recruiting costs: These include external recruitment costs such as job board fees, payments to external recruitment agencies, background checks, relocation expenses, external vendors, and employee referrals.

By calculating this accurately, you create a data-driven foundation to analyze the average cost per hire and align recruitment activities with your recruiting budget. Some organizations also choose to calculate cost per hire based on department, job level, or sourcing channel to gain more granular insight.

How to calculate cost per hire

Here are the steps on how to calculate cost per hire:

1. Step 1: Gather your cost data

   Start by collecting all relevant cost data and hire data for the recruitment process within a defined time period, including the number of positions filled and how those hires were sourced. From job postings to technological platforms, this covers all costs associated with bringing in new hires. The development costs of onboarding tools or training modules used for new employee orientation are examples of hidden costs that should not be overlooked.

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2. Step 2: Add all internal recruiting costs

   Calculate your total internal recruiting costs. This covers the time spent sourcing, screening, and interviewing candidates by your internal staff and internal resources, including the hiring manager and recruiters. Include other internal organizational costs such as salaries, overhead, and recruitment function tools. Add in the price of system and strategic planning session internal recruitment costs as well.

3. Step 3: Add all external recruiting costs

   Calculate your external recruiting costs now, including payments to external recruitment agencies, job boards, outside vendors, background checks, and candidate relocation expenses. Particularly for businesses that rely heavily on external hiring or look for external hires for specialized roles, these are crucial.

   Incorporate rewards for internal recommendations and employee referrals as incentives. These external costs can mount up and affect your recruitment cost rate even if your company does not outsource much.

4. Step 4: Combine internal and external

   The total cost of hiring is determined by adding your internal and external costs. Your hiring efforts overall organizational costs will be fully visible to you as a result. To prevent underestimating the actual cost per new hire, be sure to include all line items.

5. Step 5: Use the Cost Per Hire Formula

   Finally, apply the cost per hire formula:

   The cost per hire formula is as follows: The sum of Internal Costs and External Costs is divided by the Total Number of Hires.

   Here’s a simple hire example:

   If your internal recruitment costs a total of $50,000 and your external recruitment costs a total of $75,000 for 25 hires in a quarter. The cost per hire would be:

   ($50,000 + $75,000) ÷ 25 = $5,000 per hire

   Knowing how to calculate cost per hire allows HR professionals and recruitment teams to gain a better understanding of the hiring process's financial health. It aids in determining the success of recruitment efforts, highlighting opportunities to encourage employee referrals, reducing reliance on expensive external vendors, and, ultimately, making better recruitment budget decisions.

   Factoring in both internal and external recruiting activities ensures a more accurate picture of the organization’s cost per new hire, which is essential for tracking budget effectiveness. Incorporating other recruiting metrics into your cost per hire calculation gives you a more complete picture of how well your recruitment function is performing.

This metric is critical for human resources to make informed, cost-effective decisions, whether you're fine-tuning internal and external hires strategies or completely overhauling your recruitment process. Salary.com’s new hire pay practice consulting service equips you with competitive compensation data and expert analysis to ensure your offers align with market conditions, helping you attract top talent while staying within budget.