Cost per Hire: Its Importance to Business & How to Calculate It

Hiring a new employee is an investment, and like any investment, it's crucial to understand the costs involved; cost per hire (CPH). The average cost per hire can fluctuate significantly depending on various factors, including the industry you're in, the size of your company, your location, and the level of the position you're filling.

Data from reputable sources like the Society for Human Resource Management (SHRM) also offers general benchmarks. SHRM reports that the average cost per hire in the United States is just over $4,000.

Your actual cost per hire could be significantly higher or lower, depending on your company's unique circumstances. To get a truly accurate picture of your expenses, it's crucial to calculate your own cost per hire, considering all the expenditures associated with your specific recruitment process.

What is Cost per Hire?

Consider the cost per hire (CPH) as a comprehensive measure of your company's investment in each new employee. It encompasses not only the new hire's salary but also the entire range of expenses associated with the recruitment and onboarding process.

This includes costs related to advertising the position, such as job postings and career fair participation, as well as fees paid to recruiters or employment agencies. Additionally, the CPH factors in utilizing recruitment software and tools, as well as potential expenses like candidate travel, relocation, and signing bonuses. In essence, it provides a holistic financial view of your hiring process, from the initial search to the final onboarding.

A thorough understanding of your CPH is crucial for effective budgeting and strategic decision-making. It empowers you to evaluate the efficiency of your recruitment efforts, identify areas for cost optimization, and ensure that your hiring practices align with your company's financial objectives.

Also Read: How to Attract and Retain Gen Z Talent: An Ultimate Guide

Cost Per Hire Formula

Despite its importance in strategic decision-making, the formula for calculating cost per hire is refreshingly simple. It offers a clear and concise way to assess your recruitment investments.

Let's break down each factor in more detail.

1. Internal Costs

Internal costs are the expenses your company accumulates internally throughout the process of hiring a new employee. Internal costs include but are not limited to:

• Recruitment/Sourcing Staff Costs: salaries, benefits, and bonuses for your internal recruitment team.
• Hiring Manager Costs: costs associated with time hiring managers spend away from their regular duties to participate in the recruitment process.
• Administrative Costs: general expenses supporting the recruitment function.
• Training & Development: costs for training and upskilling recruitment staff.

2. External Costs

External costs are expenses paid to outside vendors or services during hiring. External costs include but are not limited to:

• Background Checks: costs for verifying candidate information and ensuring they are fit for hire.
• Pre-screening Expenses: costs related to initial candidate assessments.
• Sourcing Expenses: costs for finding and attracting candidates.
• Travel Expenses: costs for travel related to the recruitment process.
• Third-Party Expenses: costs for using external agencies or organizations for recruitment assistance.
• Job Fair Expenses: costs for organizing or participating in job fairs.

3. Total Number of Hires

This is the total number of new employees hired within a specific period (e.g., month, quarter, year). You can include internal and external hires, temporary staff, freelancers, or fixed-term contracts.

However, this number may exclude employees who are transferred as a result of mergers or acquisitions, or employees who receive salaries from third parties.

Also Read: Technical Recruiting: Tips for Hiring Tech Talents

How to Calculate Cost per Hire

Now that we understand the formula of CPH, let's explore how to calculate it. Calculating your company's CPH is a straightforward process that can be broken down into manageable steps:

• Define Your Timeframe: Clearly define the period you want to analyze for cost per hire calculation. This could be a month, quarter, year, or any custom period aligned with your reporting needs.
• Calculate Internal Recruiting Costs: Meticulously track all internal recruiting expenses, including recruiter salaries and benefits, candidate sourcing costs (advertising, job boards), compliance measures, recruiter training, and time managers spend on recruiting tasks.
• Calculate External Recruiting Costs: Account for all external expenses, such as job ad postings, pre-employment screening fees, participation in job fairs or campus recruiting, temporary worker wages, referral bonuses, sign-on bonuses, immigration fees, agency fees, relocation costs, and travel expenses for candidates and recruiters.
• Review Total Hires: Determine the total number of employees hired within the specified timeframe, even if they are no longer with the company. This ensures an accurate calculation of your overall investment in new talent acquisition.‍
• Apply the Formula: With all the data gathered, plug the numbers into the previously explained formula.

Example: Let's say your company spent $8,000 on internal costs and $9,000 on external costs over a quarter. During that quarter, you hired three new employees.

This means your cost per hire for that quarter was $5,667. If the average CPH benchmark for your industry is around $4,500, you may have room to improve your hiring efficiency by evaluating and optimizing internal and external costs.

Also Read: Complete Guide to Employee Background Checks in Singapore

The Importance of Cost per Hire for Business

Understanding your CPH is not just about numbers; it's about making informed decisions that impact your business's bottom line. There are several benefits you can do when tracking and analyzing your CPH, such as:

1. Monitor Costs: Keep a close eye on your hiring expenses and identify areas where you can cut costs.
2. Budget Effectively: Plan your recruitment budget more accurately based on your cost per hire.
3. Enhance Efficiency: Identify bottlenecks and inefficiencies in your hiring process.
4. Assess ROI: Evaluate the return on investment of your recruitment efforts.
5. Allocate Resources: Make strategic decisions about where to allocate your recruitment resources.
6. Gain a Competitive Advantage: Efficient cost management in recruitment can free up resources for other areas of your business or allow you to offer competitive compensation packages to attract top talent.

By consistently monitoring and analyzing your cost per hire, you can make informed decisions that lead to a more efficient and cost-effective recruitment process. This strategic approach not only saves your company money but also enhances your ability to attract and retain top talent, contributing to your organization's overall success.

In an efficient and cost-effective recruitment effort, consider partnering with Talentport. We specialize in building high-performing remote teams with top talent from Southeast Asia. Our platform connects businesses with over 1 million thoroughly vetted freelancers. Discover how Talentport can revolutionize your recruitment process, reduce costs, and ensure your organization stays ahead in the competitive talent market. Schedule a demo today to learn more.