Reduce cost per hire strategies for recruitment
Beyond the industry average: Optimizing your CPH
Is your organization hemorrhaging money on your hiring process?
You’ll have no way of knowing if you don’t track your cost per hire (CPH).
According to Indeed, hiring just one employee can cost companies anywhere from $4,000 to $20,000, so there is a lot of variability involved.
By calculating and tracking your average cost per hire, you’ll know precisely how much money it takes to attract, hire, and onboard new talent.
This is crucial for making your recruitment process more efficient and cost-effective, which is why cost per hire is an important metric.
Industry averages like the one provided by Indeed are also helpful for gauging the efficiency of your recruitment process. However, there are other HR metrics to consider, such as quality of hire (more on this later).
How much you spend on hiring new employees will vary from industry to industry, so it’s critical to work based on your data.
Also, the cost-per-hire metric encompasses more than the cost of conducting interviews. Instead, CPH applies to every aspect of the talent acquisition process, including training, onboarding, and background checks.
Add your internal and external recruiting costs and divide them by your total number of hires to get your cost-per-hire value.
In this guide, I’ll explain cost-per-hire, how it can be calculated, and how you can use it to make more substantial recruiting decisions. Keep reading to learn more.
Understanding how cost per hire works
Costs per hire is a recruiting metric that measures how much an organization spends on hiring new employees.
As mentioned in the intro, it’s an all-inclusive metric that includes expenses like training and onboarding and the cost of hiring.
For recruitment teams, cost per hire is a crucial KPI (key performance indicator) that tells them approximately how much it should cost to fill an open position. As a result, an organization’s cost per hire often informs its recruitment budget.
This is because you can use CPH to determine your total recruitment expenses.
For example, if you find out that your average CPH is $5,000 and you hired 50 employees last year, you spent around $250,000 on talent acquisition.
If you’re happy with that, you could set the following year’s budget at $250,000 (or more if you plan on hiring over 50 employees this time).
Calculating CPH has other noticeable benefits, such as:
- Determining how much you spend on each aspect of the hiring process enables you to discover areas where you may be spending too much (or not enough).
- Providing a benchmark to grade the effectiveness and efficiency of your recruiting staff.
These are the main reasons why CPH has become a staple HR metric that virtually every organization calculates.
What are the components of CPH?
Many factors contribute to your cost per hire, as it combines your external and internal recruiting costs.
If you aren’t careful, these costs could begin to eat into your bottom line. By closely monitoring your CPH, you can keep your recruiting and advertising costs within a reasonable range.
The primary components of the cost-per-hire calculation include the following:
- Advertising and job posting. It’s common for organizations to advertise their open positions on job boards like Indeed and Monster. However, these spots aren’t free and don’t always come cheap. Social media platforms like LinkedIn also charge for job posting (even though they let you post one job for free), and the total cost is based on views. Organizations must monitor their spending on these platforms, as it can quickly get out of control if you aren’t careful.
- Recruitment agency fees. Not every organization will have an internal recruitment department ready to bring in new hires. Instead, they outsource the process to external recruitment agencies. Once again, these agencies don’t work for free, so you’ll have to pay for their services.
One way to lower your CPH is to analyze the recruitment agencies you work with and determine if you can get a better deal from a different provider (without sacrificing quality).
- Employee referrals. According to research, 82% of employers claim that employee referrals have the best return on investment (ROI) of all recruitment techniques. Referred employees also tend to stay at their jobs longer, with 45% staying for more than four years.
However, most employee referral programs incentivize employees to refer their friends, family, and acquaintances. These programs include referral bonuses, monetary compensation (for example, offering $50 for every new hire an employee brings in), and other perks.
This is a recruitment expense, so it’s part of your CPH. As a result, you need to keep an eye on how much money you spend on your employee referral program.
- Drug testing and background checks. Many industries subject prospects to criminal background checks and illegal drug tests to ensure they’re trustworthy and worth hiring.
Both drug tests and background checks cost money to conduct, so they’re included in your CPH. If you’re spending too much on them, consider eliminating them or looking for a new provider that charges less.
- Interview and travel expenses. If you aren’t sourcing candidates locally, you’ll have the additional cost of paying to bring them to you for an interview. Zoom interviews are a cost-effective alternative, but some companies still insist on conducting face-to-face interviews.
Other expenses include general interview costs, such as camera equipment (if the interviews are filmed), accommodation (like renting a hotel conference room), and meal expenses.
- Internal recruiting costs. You’ll have to factor their salaries into your CPH calculations if you have an internal recruiting team. The time spent on recruitment activities by hiring managers and other team members plays a role here, too.
- Training and onboarding costs. The training programs you use and your onboarding process also present expenses that factor into your CPH. There’s always plenty of room for improvement here, as you can find ways to make your onboarding process more cost-effective, and there are plenty of training programs online for price comparison.
As you can see, many factors play into your cost-per-hire metric. While this may seem daunting initially, it becomes much more manageable once you organize all your recruitment expenses.
Also, each factor provides more wiggle room for making your overall recruitment strategy more cost-effective. In this regard, it’s better to have many contributing factors since they each present opportunities to make your recruitment efforts more affordable.
Optimizing would be more difficult if there were only one or two factors, as there would be only a few options for cutting costs.
How do you calculate your cost per hire?
Now, let’s learn the standard formula for calculating the cost-per-hire metric, which is:
Internal recruitment costs + external recruitment costs / total number of hires = CPH
In other words, you add your internal and external hiring costs and divide that figure by your total number of hires.
For example, say your internal costs were $46,000, and your external costs were $45,000. On top of that, you hired 40 employees over the course of the year.
Therefore, your CPH formula would look like this:
46,000 + 45,000 / 40 = $2,275
This means that your average cost per hire is $2,275, which is very cheap in terms of CPH values. However, these are fictional values, so your totals will likely be higher.
While the cost-per-hire formula is quite simple, the complexity comes from defining your internal and external recruiting costs.
You must accurately represent your internal and external expenses to produce an accurate calculation.
Examples of internal recruiting costs
Your internal costs encompass any expense related to in-house recruitment staff and functions associated with the recruitment process.
Common examples include the following:
- The salaries for your internal talent acquisition team
- Learning and development expenses for internal recruiters (training programs, continued education. etc.)
- Indirect costs associated with internal recruiters (benefits, taxes, etc.)
For the most part, you should only include salaries for internal recruiters in this category. Including hiring managers and HR teams will muddy the waters and may make your calculations inaccurate, so stick with talent acquisition staff only.
Examples of external recruiting costs
External recruiting costs encompass more than paying the fees of external recruitment agencies (although they’re part of it). They also include things like:
- Employer branding activities like job fairs and other recruitment events
- Recruiting technology like applicant tracking systems
- Drug testing and background checks
- Posting on job boards
- Assessment centers
- Test providers (aptitude, etc.)
You’ll likely have more external recruiting costs than internal, but it will vary from organization to organization.
Determining your total number of hires
The last piece of data you’ll need is your total number of hires; there are a few different ways to measure this.
The most common method is to include all full-time and part-time employees in the count. Some popular stipulations include:
- Excluding freelancers and contractors
- Not including internal transfers
- Excluding employees on a third-party payroll
- Only counting employees who were hired internally and are currently on your payroll
You determine how to count your total number of hires but must remain consistent with your chosen method.
What’s an average cost-per-hire value?
Regarding industry benchmarks, SHRM (the Society for Human Resource Management) states that the average CPH in the United States is $4,683.
However, it’s crucial to note that this value is for non-executive positions.
The average CPH for executives is a whopping $28,329, significantly higher than the standard average.
So, don’t panic if your CPH turns out to be drastically higher than the average. Many factors play into it, including the type of position you’re trying to fill.
As mentioned, it’s best to combine CPH with other HR metrics, such as quality of hire and time to hire.
For instance, if your CPH is high but your quality of hire is also high, you’re spending more because you’re attracting top talent, which is a good thing.
Also, your time to hire can impact your CPH, as you may take too long to fill open positions. If your CPH is surprisingly high, look at these other metrics to piece together more of the puzzle.
Why is cost per hire an important metric to measure?
Lastly, let’s examine why it’s worth taking the time to calculate your organization’s CPH.
The benefits of making this calculation include:
- Improving the cost-efficiency of your recruitment process. You’ll never know if you’re wasting money without a way to gauge how much you’re spending on hiring new employees. Calculating CPH provides the data needed to pinpoint areas where you can save money.
- Measuring the effectiveness of your recruitment strategy. Are your recruiters firing on all cylinders, or is there room for improvement? Measuring your CPH will help you discover if there are any inefficiencies in the process.
The metric can also help you measure the performance of your recruitment team. If your CPH is through the roof but your quality of hire is down, it’s a sign that your recruiters aren’t doing quality work.
- Better allocation of resources. This benefit ties in with the first one. Since you’ll know precisely where you’re spending money during recruitment, you can allocate your organization’s resources better.
For example, if you discover that you’re spending a lot of money posting on a particular job board but are receiving little-to-no candidates from it, you should cut ties with them and find another platform.
Cost-saving measures like these will help you get the most bang for your organization’s buck.
- Have an easier time attracting top talent. One of the most significant benefits of tracking CPH is that it’ll help you attract better candidates. Since measuring CPH will help you optimize your recruitment process, you’ll provide a strong candidate experience, which is crucial for attracting top talent.
Ultimately, the goal is to tweak your recruiting process until you’re A) spending the least amount of money possible and B) sourcing the strongest candidates available.
Every organization must have a hiring process, so recruitment costs cannot be avoided. However, tracking your CPH ensures you get the most value for each dollar spent.
Final thoughts: Calculating the cost-per-hire metric
Here’s a recap of what we’ve covered:
- Cost per hire is a recruitment metric that tells you how much your organization spends to hire one employee.
- CPH has many components as it encompasses the entire recruitment process, not just interviewing and hiring. Things like onboarding, training, and criminal background checks also contribute to CPH.
- Calculate your CPH by adding your internal and external recruiting costs and dividing by your total number of hires.
- Calculating your CPH will help you attract top talent, optimize your recruitment process, and better manage costs.
Ready to take control of your hiring costs? Start calculating your CPH today!
More resources:
Calculating full-time equivalent (FTE): Benefits and uses
Job enlargement vs. enrichment: Key differences explained
Ten handbook policies no employer should be without in today’s workforce
Want more insights like these? Visit Matthew Scherer’s author page to explore his other articles and expertise in business management.