How to Calculate Cost-per-Hire to Improve Recruitment Efficiency
Recruitment costs are one slice of the operational expense pie that, if left unchecked, can swell excessively. Whether you’re a seasoned HR professional or a company manager looking to bolster your team, understanding your cost-per-hire is the secret to recruitment efficiency.
Since competition is fierce in talent acquisition, maintaining control of your hiring expenditures is crucial. The average cost-per-hire will show if you’re overspending or underspending on talent. Learn to make the most of your hiring budget!
What is Cost-per-Hire?
Cost-per-hire is a metric used in human resources to measure the costs of hiring new employees. Cost-per-hire expenses include acquisition and advertising, screening and travel expenses, onboarding and training, and miscellaneous signing bonuses.
For example, if you spend $10,000 yearly on recruitment and hire 10 employees in one year, your recruitment cost-per-hire is $1,000. Meanwhile, if your average cost-per-hire is $1,500 and you plan to hire 30 employees this year, you can expect to spend around $45,000.
Why is Cost-per-Hire Important?
Aside from your time-to-hire rate, knowing your cost-per-hire can help you create a successful recruitment plan. It ensures you allocate resources wisely, target suitable talent pools, and ultimately build a robust, cost-effective workforce. Here’s why determining your cost-per-hire is beneficial to your company.
1. Financial accountability
Calculating your cost-per-hire ensures transparency in recruitment expenses. It breaks down recruitment expenditures, revealing how much you spend on sourcing, advertising, and other associated hiring processes. This level of detail helps you identify areas where you can cut costs and reallocate funds.
2. Efficiency benchmark
Cost-per-hire is an essential key performance indicator (KPI). You can assess the effectiveness of your recruitment process by tracking this metric over time. It also helps you pinpoint which sourcing channels, screening methods, or interview stages are more efficient as you apply them.
3. Budget planning
An accurate cost-per-hire figure lets you plan your recruitment budget with precision. It can prevent overspending or under-allocating resources, ensuring you have the finances to secure top talent without unexpected financial burdens.
4. Competitive advantage
Staying competitive in today’s cutthroat hiring market can be challenging. The good news is understanding your cost-per-hire and recruitment process lets you make more effective decisions. You can identify the most rewarding strategies and invest in areas that give you a competitive edge.
5. Return on investment (ROI) assessment
Cost-per-hire is the central measurement of your recruitment team’s ROI. This figure lets you determine if your hiring strategies enable you to land employees who significantly contribute to your company.
How to Calculate Cost-per-Hire
Now’s the time to roll up your sleeves and get into the nitty-gritty. Here’s the cost-per-hire (CPH) formula HR professionals use:
CPH = (Internal recruiting costs + External recruiting costs) / Total number of hires
1. Calculate internal costs
Internal costs are the expenses your organization directly incurs for recruitment and hiring, including:
- In-house talent acquisition team salaries
The salaries and benefits of your internal recruiting team belong to this category. Here, you add the wages, benefits, and related expenses of the HR department⎯from the recruiter to the coordinator and the manager.
- Learning and development costs for your recruiting team
These expenses relate to improving the skills and knowledge of your recruiting team. They may include training programs, workshops, and educational materials that enhance their capabilities in sourcing and hiring.
2. Calculate external costs
External costs are relevant expenses your organization pays to third parties.
- Employment tests
These are the assessments you use to test the abilities of applicants. These pre-employment testing services give you more insight into applicant skill levels.
The tools and software you use in your recruitment process, such as an applicant tracking system, recruiting software, and other digital services, comprise these costs.
- External agencies
These are fees from external recruitment agencies to help you find candidates.
There are costs to promoting job openings, such as posting fees on job boards and running online ads or promotional campaigns.
3. Add both, then divide by the number of hires
Add your total internal and external costs, then divide the sum by the number of hires during a specific period.
Sample Cost-per-Hire Calculation
You hired eight people last year. At the time, your internal and external costs were as follows:
- In-house talent acquisition team salaries: $30,000
- Learning and development costs: $3,000
- Employment test costs: $1,000
- Technology costs: $2,000
- External agency fees: $3,000
- Advertising fees: $1,000
To calculate your cost-per-hire, apply the numbers to the formula:
CPH = [(30,000+3,000) + (1,000+2,000+3,000+1,0008)] / 8
CPH = $40,000 / 8 hires
CPH = $5,000
That means your previous year’s cost-per-hire was $5,000. Using this figure, you can decide which expense to reduce, remove, or maintain when setting the budget for the following year.
Turn Dollars into Talent
Talent is the lifeblood of any successful organization but can be expensive to acquire. Your proficiency in calculating and managing your cost-per-hire is the foundation of maintaining a cost-efficient hiring process and avoiding pitfalls, such as the cost of a bad hire or hiring someone who doesn’t perform their role well.
Though, why risk a bad hire in the first place? When you partner with a pre-employment assessment test provider, you minimize the chances of hiring an underqualified or ill-fitting applicant. EmployTest offers pre-employment assessments to match the perfect applicant for any position, making sure every hire is worth the cost.