Cost Per Hire

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Cost Per Hire

What is the Cost Per Hire?

Cost per Hire (CPH) is a crucial metric that businesses use to assess the financial efficiency of their hiring processes. Simply put, it measures the average amount of money a company spends to make a single hire. This includes all the expenses related to recruitment, such as advertising job openings, operating recruiting software, and the time that HR staff spend on various hiring activities.

Understanding Cost per Hire is essential for businesses because it helps them identify opportunities to optimize their recruitment strategies. By analyzing CPH, companies can determine whether they are spending too much on certain aspects of hiring and explore ways to streamline their processes for better financial efficiency. This metric is especially valuable for HR professionals and business managers who are aiming to maintain a balance between effective hiring practices and budget constraints.

How to Calculate Cost Per Hire?

To calculate Cost Per Hire, you'll need to follow a straightforward formula:

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

Here’s a breakdown of the formula to help you understand and apply it effectively:

  1. Internal Recruiting Costs: These include all expenses incurred within your organization during the recruitment process. This might cover the salaries of the HR team, costs of internal recruitment tools, and other overheads associated with the hiring process.
  2. External Recruiting Costs: These are the expenses related to external services and resources used for hiring. Examples include fees paid to recruitment agencies, costs of advertising job openings on job boards, and expenses for hosting job fairs.
  3. Total Number of Hires: This is the total number of employees successfully hired during the period you are measuring.

Internal Recruiting Costs

These costs are associated with the internal resources used during the hiring process. Common internal recruiting costs include:

  1. Salaries of HR Staff: Wages paid to the HR team members who are directly involved in the hiring process.
  2. Recruitment Technology: Costs for HR software systems like applicant tracking systems (ATS), recruitment CRMs, and other digital tools used to manage the hiring process.
  3. Employee Referral Programs: Expenses related to incentive programs for employees who refer candidates who are eventually hired.
  4. Interview Expenses: Costs incurred in conducting interviews, which may include technology for video interviews or travel expenses for in-person interviews.
  5. Internal Recruiting Events: Costs for organizing internal job fairs or recruitment drives.
  6. Training for Recruiters: Expenses related to training HR personnel on new recruitment techniques or technologies.

External Recruiting Costs

These costs are incurred when using external services or resources to aid in the recruitment process. Common external recruiting costs include:

  1. Advertising Fees: Costs for posting job ads on online job boards, social media platforms, industry-specific forums, or in print media.
  2. Recruitment Agency Fees: Fees paid to external agencies that help find and pre-screen candidates.
  3. Background Check Services: Costs for conducting background checks, credit checks, and reference checks through third-party services.
  4. Job Fairs and Recruitment Events: Expenses for participating in external job fairs or recruitment events, including booth fees, travel, and promotional materials.
  5. Technology and Software Subscriptions: Expenses related to external platforms for skills assessments, video interviewing software, or other specialized recruitment tools not owned by the company.

Step-by-Step Calculation of Cost Per Hire:

Step 1: Identify Internal Recruiting Costs

  1. Salaries of HR Staff: The company employs two HR personnel primarily for recruitment, each earning $50,000 per year, allocating about 50% of their time to recruitment. Total = $50,000 x 2 x 0.5 = $50,000
  2. Recruitment Technology: The company uses an applicant tracking system that costs $500 per month. Total = $500 x 12 = $6,000
  3. Employee Referral Programs: The company offers a $500 bonus for each successful hire through referrals. Total = $500 x 5 = $2,500 (assuming 5 hires came through referrals)
  4. Interview Expenses: Costs for video conferencing software and occasional travel for candidates. Total = $3,000
  5. Internal Recruiting Events: The company holds an annual internal job fair costing. Total = $2,000

Total Internal Recruiting Costs: $50,000 + $6,000 + $2,500 + $3,000 + $2,000 = $63,500

Step 2: Identify External Recruiting Costs

  1. Advertising Fees: Costs for posting jobs on LinkedIn, Indeed, and other platforms. Total = $4,500
  2. Recruitment Agency Fees: The company uses an agency for specialized roles, which charges a fee of 15% of the first year's salary (average salary of $60,000). Total = $60,000 x 0.15 x 3 = $27,000 (assuming agency helped with 3 hires)
  3. Background Check Services: Each background check costs $100. Total = $100 x 10 = $1,000
  4. Job Fairs and Recruitment Events: Participation in an external job fair. Total = $1,500
  5. Technology and Software Subscriptions: External skills assessment tools. Total = $1,200

Total External Recruiting Costs: $4,500 + $27,000 + $1,000 + $1,500 + $1,200 = $35,200

Step 3: Calculate the Total Number of Hires

Total Number of Hires = 10

Step 4: Calculate Cost Per Hire

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

Cost Per Hire = ($63,500 + $35,200) / 10 = $98,700 / 10

Cost Per Hire = $9,870

Industry Average Cost Per Hire

  • Accommodation and Food Service/Arts/Entertainment/Recreation: $1,070
  • Manufacturing: $3,497
  • Public Administration/Education: $4,160
  • Information/Finance and Insurance/Real Estate: $4,173
  • Construction/Utilities/Agriculture/Mining: $4,371
  • Wholesale Trade/Retail Trade/Transportation and Warehousing: $4,705
  • Healthcare and Social Services: $4,770
  • Administrative Support/Other Services: $6,338
  • Professional, Scientific, and Technical Services/Communication: $6,464

Source: SHRM Benchmarking

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