Calculating cost-per-hire and why it is important
Any business is an intricate structure comprised of many different components. Having the right set of metrics in place and tracking them over time is instrumental to understanding how a company is performing. Metrics are important as they help to identify strengths and weaknesses within an organization allowing to pinpoint and address issues as those arise as well as formulate strategies and necessary tactics.
As an organization’s workforce is both an asset and an investment HR activities too are quantified and tracked through a variety of recruiting metrics that help assess what works well and what doesn’t in the recruiting process. One such key metric is the cost-per-hire.
“People are not the most important asset. The right people are”
Jim Collins (author/management guru)
What is Cost-per-Hire?
Cost-per-hire is an efficiency metric and it measures the cost a company spends to hire new employees. It is a recruitment metric designed to measure the cost effectiveness of the hiring process and it is used to evaluate and compare hiring expenses. In an ideal world you need to hire the best available talent for the least cost in the shortest time period.
Numerous studies have been conducted in order to provide a reliable figure that can act as a guide/benchmark of the avg. cost of hire. When we are talking about new hires , the Society for Human Resource Management (SHRM) conducted a survey which indicated that the average cost to hire an employee is $4,129, while the average time it takes to fill a given position is 42 days. Similarly, Bersin by Deloitte’s Talent Acquisition Factbook, findings indicate that the average hire in the U.S.costs $4,000 and can take up to 52 days to fill an open position.
In the case of turnover- when an employee leaves an organization voluntarily and needs to be replaced- research indicates that the costs incurred by a company for a direct replacement can be as high as 50%-60% of an employee’s annual salary while associated turnover costs can range for 90%-200% of annual salary.
The term cost-per-hire started appearing in journals in the late 1960’s and by the mid-1980 following a series of Cost-per-Hire surveys that were conducted a standard formula was created.
According to the Cost-per-Hire American National Standard report by the Society for Human Resource Management (SHRM) in collaboration with the American National Standards Institute the formula to calculate cost-per-hire is the following:
Source: Cost-per-hire American National Standard, SHRM
Figuring out the cost of hiring can be a tedious task as many different parameters come into play. In order to calculate the cost-per-hire you need to first define the period you are looking into, then identify the relevant external and internal costs incurred and the total number of hires during the specific period.
External costs refer to the costs that need to be incurred during the recruitment process outside of your company and take the form or a paid-out expense. Some examples of external costs are:
- Job Fairs and Recruitment Event Expenses: there can include any expenses made in relation to an event such as participation fees, booths, equipment rental
- Travel Expenses: these include expenses incurred either by the company’s personnel ( expenses to attend an event) or the candidate himself ( travel expenses for an interview)
- Referral Awards to Employees: employee referrals are considered one of the best ways to source good candidates for a position. Employees are offered reward incentives if a referral is hired.
- Third-party fees: fees paid to external agencies associated with the recruiting process
- Technology Costs: tools and infrastructure relating to the recruiting process such as Applicant Tracking Systems ( ATS) such as Workable or Greenhouse, validated pre-employment assessment tools such a Bryq or other reporting systems.
- Advertising and Marketing Expenses: Costs relating to the advertising or marketing of a specific position – for example job boards, social networks, marketing materials for job fairs
Internal costs refer to costs incurred inside the organization- these may include but are not limited to:
- Recruiting and Sourcing Staff Costs: salaries, benefits, incentives of your recruiting personnel full part-time or contracted
- Fixed costs: percentage of office costs – i.e. rent, incidentals and other capital expenses- attributed to recruiting department.
- Learning and Development: recruiting team related career development costs
- Interview Costs: estimate the cost of recruiter/ hiring manager time by counting the number of interview hours and then multiplying that by the hourly salary of interviewer.
Sum up all your external and internal costs and divide by the total number of hires in a given time period and that will give you your cost of hire. How often you choose to do this calculation is based on your hiring cycles – if you are hiring a lot you should consider a quarterly calculation or a per recruitment campaign calculation if your hiring is more spread out within the year then you might consider a semi-annual or annual calculation.
Why is cost-per-hire Important?
Cost-per-hire has many uses and below you can find some ways it can help your organization:
- As a benchmark between other companies and industry averages and your company’s y-o-y performance
- As a budgeting and strategic planning tool for future cost prediction
- As a performance measure for the recruiting department
- As an indicator of where most of your recruitment money is spent
- As an optimization tool of your company’s recruiting expenses over time helping to uncover and reduce inefficiencies
With talent related challenges being among the most important concerns of business leaders cost and quality related recruiting metrics require a delicate balancing act. So, while knowing your cost-per-hire matters how you use this metric is also very important because attracting quality candidates can be expensive but the wrong candidate can prove far more costly ($17,000 on average) than the right investment during the recruiting process.
The fact that it is a cost metric does not necessarily mean that it automatically needs to be lowered- the metric may uncover that perhaps you are not spending enough to attract the right kind of candidates (which is actually costing you more in the long-run) or may reveal the strategies that work well and those that don’t!
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