Calculating And Using Cost Per Hire The Right Way

Calculating And Using Cost Per Hire The Right Way

Emily Smykal

cost per hire formulaIn most cases, talent acquisition leaders must justify their methods and expenses during the recruitment process. As a result, the cost per hire metric has become an essential data point. Cost per hire, when calculated correctly, pulls together all of the costs associated with filling an open position, and determines the average amount spent to hire a new employee for that role.

The cost per hire metric places an economic value on the resources required to attract and hire new employees. And while cost per hire does not paint a full picture of an organization’s recruiting abilities, the cost of talent acquisition should not be ignored. High cost per hire will certainly attract attention from senior leaders. Low cost per hire may impress your organization’s CFO and free up resources for other purposes. But it’s important to determine the level of investment that provides the best outcomes for an individual organization.

Recent research from Bersin by Deloitte found that businesses with the most mature talent acquisition strategies actually have higher cost per hire–averaging $6,465. This is compared to an average of $3,258 among the least mature, and most reactive, talent acquisition strategies. But those costs include a range of tactics that not every organization will require–often resulting in a higher quality of hire which offsets the higher cost per hire over time. In this post we’ll discuss how to calculate cost per hire, and how any business can use it regardless of their budget expectations.

How to Calculate Cost Per Hire

Cost per hire can seem like a daunting figure to calculate due to the number of items it involves. Cost per hire adds up internal and external expenses, so talent acquisition leaders will need to collect accurate spending data for every activity related to filling an open position.

External costs: all outside spending for recruitment in the designated time period

  • Third-party fees, such as agencies
  • Advertising costs including job boards and social media
  • Job fair and campus recruiting costs
  • Travel expenses for recruitment
  • External assessments, background checks and drug tests

Internal costs: all internal spending for recruitment in the designated time period

  • Salary, benefits, and career development of the recruiting team
  • Talent acquisition system costs–hardware and software
  • Other fixed costs such as employee referrals, government compliance, etc.

Once all external and internal costs have been determined, the total expenses should be gathered over a specific time period. The same time period, whether it’s monthly, quarterly, or annual, should also be used when adding up the total number of hires. And total number of hires includes all new staff regardless of their type. Full time or part time, temporary or permanent, recruitment costs should reflect the expenses required to hire all types of employees in that given time period. If needed, deeper dives can be taken later.

Armed with this data, any company can use the following formula to determine their cost per hire:

Cost per Hire ($) = [Total External Costs] + [Total Internal Costs] / Total Number of Hires

A straightforward cost per hire calculation will look something like this. But every talent acquisition team will come up with its own list of internal and external costs, and will add them up over their own designated timeframe. Consistency in measurement will become the most crucial factor as HR leaders calculate cost per hire over time.

Benchmark Data and Other Factors to Consider

Bersin by Deloitte estimates the national average cost per hire, regardless of talent acquisition maturity, is $4,000. This ranges from $3,033 in healthcare to $5,611 for manufacturing jobs. However, cost per hire will vary dramatically from one business to another depending on the variety and volume of skills sought, and the approach used to recruit quality hires. The best cost per hire benchmark data for talent acquisition leaders will be internal, year over year changes in cost per hire that come from consistent measurement.

And besides comparing cost per hire figures, talent acquisition leaders should consider other, related metrics. The recruiting cost ratio (RCR), for example, takes other factors into account such as labor market conditions, job functions, compensation and skill levels. But regardless of how costs are calculated and analyzed, HR leaders should keep in mind the fact that cost per hire does not represent ROI.

Why You Shouldn’t Be Afraid of Your Cost Per Hire

Ideally, cost per hire data will go hand in hand with metrics like quality of hire, to provide a well-rounded look at an organization’s overall recruitment methods. And if cost per hire figures routinely come in at the same level, it would be easy to think that the talent acquisition team has their strategy pretty well mastered. But such complacency actually hides the full picture.

Increasing or decreasing cost per hire could indicate investment in new recruiting software, or new approaches to advertising and social media recruitment. It might suggest a more holistic approach to talent acquisition, emphasizing improving the candidate experience over continuing traditional methods. As shown in the model below, this typically results in a higher up front investment that drives improvements in cost per hire over time, as opposed to sticking with traditional linear recruiting strategies.

reducing cost per hire in recruiting
No matter which recruitment methods you prefer, or what your budget is, your cost per hire should reflect what you think is the best way to allocate resources to attract and hire the best talent, and not simply how well you cut costs.

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