Recruitment is an expensive but important activity for most companies, so managing hiring costs efficiently is critical for success. Cost per hire is a foundational recruiting metric, offering insights into the total cost associated with bringing on a new employee.
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By calculating cost per hire and comparing it to industry averages, hiring teams can improve their recruitment process, streamline spending, and optimize resources across internal and external recruitment channels. This blog will explore the following topics:
Cost per hire is the average cost of hiring a new employee during the full recruitment process. It includes all internal and external costs, such as advertising on job boards to managing the onboarding process. Understanding the cost per hire is essential for human resources and hiring managers aiming to maintain a balanced recruitment budget.
Analyzing cost per hire data can reveal inefficiencies, help track internal costs versus external costs, and even pinpoint areas in the hiring process that need improvement. Let's explore how to break down recruiting costs, calculate cost per hire, and apply this metric effectively to enhance your recruitment strategy.
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These costs typically fall into two main categories: internal recruiting costs and external recruiting costs. Together, they represent all expenses related to the hiring process, including recruitment agency fees, job board postings, and internal HR resources.
Internal recruiting costs include expenses incurred by the in-house recruitment department. These can cover HR staff salaries, benefits, recruitment technology, and sometimes referral bonuses for internal and external hires. Training programs for hiring managers or hiring teams may also factor into internal costs, especially for positions requiring specialized skills. Additional onboarding costs such as relocation expenses and immigration expenses may come into play for international hires.
Internal costs can really add up, especially if an organization needs to constantly replenish its new hires. Regular tracking of these costs ensures they remain within the recruitment budget and provides an accurate cost per hire formula for future hiring projections.
External recruiting costs include expenses related to third-party services, including external recruitment agencies and job boards. External recruitment agencies often help reduce administrative workloads but may carry high recruitment agency fees. Job boards like LinkedIn, Indeed, and ZipRecruiter provide broad candidate reach, although they come with additional advertising costs. While agencies and job boards can expand candidate pools, regular monitoring helps manage these external costs effectively.
Leveraging job board posting discounts or evaluating the effectiveness of various platforms can help companies reduce external costs. To maximize efficiency, some organizations might even choose to post jobs on free platforms when possible.
The cost per hire formula provides a clear way to quantify the total recruiting costs over any given time. The formula is as follows:
Cost per Hire = (Total Internal Recruiting Costs + Total External Recruiting Costs) / Number of New Hires in any given time
When calculating cost per hire, organizations should include every expense related to the hiring process. This includes both internal and external recruitment costs such as referral bonuses, recruitment agency fees, onboarding costs, and more.
Accurate tracking of these metrics allows companies to compare hire data with industry averages and analyze their recruiting process to identify inefficiencies. Ensuring consistent data entry and tracking, as suggested by the American National Standards Institute, will also help maintain the accuracy of cost per hire calculations.
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Measuring cost per hire gives organizations a comprehensive view of their recruiting budget. By understanding how much it costs to bring in each new employee, companies can refine hiring practices and optimize their recruitment processes.
This metric also serves as a way to compare your hiring cost with industry benchmarking standards. If the organization's cost per hire is significantly higher than the industry average, it may point to excessive spending in specific areas, such as external recruitment costs or onboarding. Cost per hire analysis provides actionable insights, allowing businesses to align their recruitment efforts with budget constraints.
Optimizing your cost per hire requires a combination of strategic planning, efficient processes, and cost-effective resources. Here are some effective strategies that we recommend:
Adopting recruitment technology can streamline hiring, reduce administrative tasks, and save time, ultimately cutting down costs. Automated tracking of recruitment expenses helps reduce time-consuming manual entries and enables real-time analysis.
One of the most cost-effective ways to source new employees is through employee referrals. Not only does it minimize advertising costs, but it can also result in higher retention rates and lower onboarding costs. Many companies even offer referral bonuses to incentivize employees to recommend candidates.
Hire data from cost per hire metrics can inform recruitment decisions, highlighting areas where improvements are needed. Analyzing where recruiting efforts succeed or fail lets companies fine-tune their recruitment strategy and focus on cost-effective sourcing methods.
Employee retention is directly linked to the cost per hire. High turnover rates necessitate frequent hiring, increasing the average amount spent per new hire. Strengthening retention practices can reduce overall recruitment costs and improve the stability of the workforce.
Comparing a company’s cost per hire to the industry average using benchmarks is common practice. Industry standards offer valuable context on whether a company’s recruitment practices are aligned with average costs in the sector. Organizations with significantly higher costs per hire might need to reassess their recruiting strategies, as it could indicate inefficient hiring practices or recruitment processes that require streamlining.
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Calculating cost per hire might seem straightforward, but there are several common pitfalls that can lead to inaccurate or misleading results. Understanding these pitfalls can help organizations better track and manage their recruitment costs, providing clearer insights for strategic decision-making. Here they are:
One of the most frequent errors in cost per hire calculations is neglecting to account for all internal and external costs associated with hiring. Many recruitment departments focus solely on obvious expenses, such as recruitment agency fees or job board posting costs. However, there are numerous indirect costs that impact the true cost per hire, including but not limited to:
Onboarding costs
This includes training sessions, materials, and resources needed to get a new employee up to speed. Skipping these costs can lead to underestimating the total spend on new hires.
Immigration and relocation expenses
For hires who may need to relocate, relocation expenses or visa application fees should be factored in. These can significantly impact the average cost per hire if not considered.
Time and resources
Hiring managers often spend significant time reviewing resumes, conducting interviews, and discussing candidates. The cost of their time is a critical element, especially for executive or specialized roles. Ignoring this can distort the recruiting cost rate and cost per hire formula.
The hiring manager plays a central role in the recruitment process, but companies often neglect to factor in their time and effort. From defining job requirements to participating in interviews, hiring managers contribute considerable time to the process, especially for internal and external hires requiring multiple interviews or rounds of selection. Failing to account for their input can lead to an underestimation of internal recruiting costs.
Including the cost of a hiring manager's time in the cost per hire calculation is particularly important for high-skill or executive roles. Estimating the time and multiplying it by their hourly wage can help ensure that this cost is accurately reflected in internal costs.
Recruitment processes and recruitment expenses are dynamic, and organizations often neglect to update their cost per hire calculations to reflect changes. For instance, if an organization implements a recruitment software that reduces costs or moves to more cost-effective job boards, failing to update the calculations will result in outdated metrics that don’t accurately represent current expenses.
Similarly, if the company adjusts its recruitment strategy to include more external agency use or increase advertising costs, the cost per hire data should be revisited to reflect these adjustments. Regularly reviewing and updating cost calculations ensures that the metric remains accurate and relevant to current hiring practices.
Organizations often lump all recruiting costs together without distinguishing between internal recruiting costs and external recruiting costs. While the total cost per hire is an essential metric, breaking down the costs into internal and external categories usually provides more insight.
For example, if external costs are disproportionately high, it may suggest an over-reliance on recruitment agencies or paid job boards. This could be replaced by employee referrals or other cost-saving measures. Conversely, high internal costs could indicate inefficiencies with the internal recruiting practices or possibly overstaffing within the recruitment department. Segmenting these costs helps target specific areas for improvement in the recruiting process.
Calculating your cost per hire is valuable, but without comparing it to industry averages, it can be challenging to gauge where your organization stands. Third-party data providers like CompanySights can provide your organization with benchmarks to determine whether your cost per hire is competitive or if it may indicate inefficiencies within the hiring process.
For example, if a company's cost per hire is significantly higher than the industry standard, it might suggest excessive spending on certain external recruitment expenses or a need for process optimization. Regular benchmarking allows companies to identify if their costs align with others in the industry and make necessary adjustments.
The hiring process doesn’t end when a candidate accepts an offer. Onboarding costs, which can include training, mentorship, orientation programs, and initial productivity lag, are often overlooked. This occurs even though they contribute to the total cost of acquiring a new hire. Ignoring these costs can skew cost per hire data and impact financial planning.
Accurately factoring in onboarding costs provides a fuller picture of the investment involved in bringing in a new employee. It also highlights the importance of streamlining onboarding practices to reduce these costs, improve time-to-productivity, and enhance employee retention.
Organizations sometimes hire temporary or fixed-term contracts to meet short-term needs or support project work. However, they may overlook the associated costs when calculating cost per hire. Fixed-term contracts often come with specific recruiting costs, such as specialized job postings or targeted advertising costs, which should be factored into the total cost calculation.
Including these costs ensures the cost per hire metric reflects both permanent and temporary recruitment expenses. Moreover, tracking these costs can help determine if hiring temporary staff is truly cost-effective or if a different staffing approach would be more financially viable.
Cost per hire is an essential metric, but it should be viewed as part of a broader set of recruiting metrics. Focusing solely on reducing cost per hire without considering the quality or retention of new hires can lead to short-sighted hiring practices that ultimately harm the organization. For instance, prioritizing cost savings may lead to cutting corners in candidate assessment, which could result in lower-quality hires or higher turnover rates.
To manage cost per hire effectively, HR teams should consistently track and review their data. Here are four quick and simple best practices to follow:
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Mastering cost per hire is a vital part of managing a successful recruitment strategy. By understanding internal and external costs, calculating cost per hire accurately, and refining recruitment processes, HR professionals can ensure that recruitment budgets are optimized, and organizational resources are used effectively.
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