How to Calculate Cost Per Hire: Formula, Meaning & Components

Recruitment and talent acquisition are undoubtedly one of the most crucial aspects of a company's continuous growth. But how much does it really cost to hire an employee?

A recent report suggests that the average cost per hire in the U.S. is $5,475. However, many employers estimate that hiring a new employee costs three to four times the position's annual salary. This means it could cost $150,000 to $200,000 to fill a role that pays $50,000 per year.

As an employer, you have to be aware of these numbers as they greatly impact your company's finances. In this article, we'll discuss everything you need to know about the cost per hire. What does it mean? Why is it important? And how do you calculate it? Let's find out!

What is the meaning of cost per hire?

Cost per hire (CPH), also known as the fee for hire, is an HR recruiting metric representing the total amount it costs a company to hire new employees. This figure includes all the expenses needed to execute the recruitment process, such as:

• Talent sourcing

• Recruitment advertising costs

• Onboarding programs

• Referral bonus programs

• Cost of recruiting technology

For example, if you hire 500 new employees every year and your average CPH is $3,000, then you may spend an average of $1,500,000 on hiring costs that year. You may evaluate the CPH according to your entire company's hiring metrics or just an individual department.

The cost of hire is an important metric in every organization's workforce planning. Together with other reliable data, Salary.com's consultants can help you make better decisions on job structures, recruitment budget, and hiring to achieve your organization's long-term objectives.

Why is the cost per hire important?

Profitability is the top priority in your goals as a business owner. Therefore, you should always understand how to allocate your resources better within profitable areas in the business.

Cost per hire helps you achieve this by enhancing the organization's cost visibility so you can understand where the profit goes all the time. It gives a clear perspective on how an organization's recruitment efforts perform, allowing them to improve their efficiency, optimize their budgets, and make data-driven decisions about their hiring strategies.

The fee per hire also helps you gauge the competitiveness of your company's new hire pay practices, whether they're above or below current market prices. Salary.com's consultants can help you analyze your candidate pool and make smart pay decisions to win the talent war.

Cost per hire formula

Businesses usually calculate CPH based on specific periods such as monthly, quarterly, or annually. According to a study conducted by the American National Standards Institute (ANSI) and the Society of Human Resources Management (SHRM), the cost per hire formula is:

Cost Per Hire = (Internal Recruiting Costs + External Recruiting Costs) / Total Number of Hires

Every component of this formula is crucial to determining the exact amount of the cost to hire new employees. However, you have to keep in mind that each company follows its own recruitment process. Therefore, some components may or may not apply to each organization.

Components of cost per hire calculations

As mentioned above, some components of the CPH formula may not apply to all companies. You must assess your organization's recruitment to determine which components apply.

• Internal recruiting costs

  These are primarily composed of the internal organizational costs incurred by a company related to its hiring process, including the recruitment team salary, training and development budgets, referral programs, and more. Below are some examples of internal recruiting costs:

  • Hiring manager costs

  • Recruitment staff costs

  • Training and development costs

  • Administrative costs

  • Organizational costs

  • Compliance costs

• External recruiting costs

  These are basically the costs associated with external or third-party services your company avails to facilitate the recruitment process. There are cases when some of the internal recruiting costs mentioned above are outsourced to external companies.

  • Background checks

  • Third-party agency

  • Marketing costs

  • Screening expenses

  • Technological expenses

  • Job board fees

  • Relocation expenses

  • Signing bonus

  • Referral bonus programs

• Total number of hires

  The total number of hires represents employees who were successfully hired by your company during a specific time period. This number may include internal or external employees, temporary staff, freelancers, or contractual professionals.

  Turn Your Pay Into Profit

  Turn your pay system into a growth engine.

  Boost ROI

  On the other hand, employees who were transferred due to mergers or company acquisitions together are usually not included in the total number of hires. Simply said, it all depends on the outcome you want to achieve in calculating the fee per hire.

  Remember that these components of cost per hire are significant HR metrics that track the effectiveness of your company's hiring processes. Carefully assess your current recruitment process to accurately pinpoint which external and internal costs to consider.

How to compute cost per hire?

The following are key steps in the process of calculating CPH, along with actual computations and examples:

Step 1: Establish the time period

What time period do you need for calculating the fee per hire? Why and how are you planning to use this data in your recruitment process? Salary.com's consultants can help you decide the most feasible time period to use and create reliable, long-term financial forecasts.

Step 2: Calculate internal recruiting costs

Tally all of the internal recruiting costs incurred by your company during the specified time period. Let's use the table below as an example:

Internal Recruiting Costs	Amount in USD
Recruitment team costs	$5,000
Administrative costs	$2,000
Compliance costs	$500
Hiring manager expenses	$2,000
Office expenses (rent, equipment, utilities)	$3,500
Total internal cost	$13,000

Step 3: Determine external recruiting costs

Carefully determine every external recruiting cost billed by your company, including outsourced tasks, third-party company services, and HR technology subscriptions. For example:

External Recruiting Costs	Amount in USD
Marketing costs	$6,000
Job fair expenses	$4,000
Background checks	$2,000
Screening costs	$1,500
Third-party agency fees	$3,500
Technological expenses	$5,000
Total external cost	$23,000

Step 4: Identify the total number of hires

Review the actual total number of hires by your company during the specified time period. Take note to also include those employees who were hired during that time period but have since left the company (including internal and external hires).

In this case, let's assume that you're calculating the CPH data for the quarterly time period of January to March:

Total number of hires = 8

Step 5: Apply the cost per hire formula

Finally, you can now plug these components (total number of hires, internal and external costs) into the CPH formula:

Cost per hire = (Internal Recruiting Costs + External Recruiting Costs) / Total Number of Hires

Recruitment Cost	Amount
Internal recruitment cost	$13,000
External recruitment cost	$23,000
Total number of hires	8

CPH = ($13,000 + $23,000) / 8

Cost per hire = $4,500

According to a study, the average cost per hire in the U.S. is $5,475. Therefore, a cost per hire of $4,500 is below the reported average and may indicate that your company has an efficient hiring process.

However, this could depend on several different factors, such as the type of jobs, quality of hires, and referral bonus programs. Salary.com's consultants can help your company benchmark its hiring performance in comparison to the market trends and improve key areas for better results and a return of investment.