Cost per Hire: How to Calculate & Why it’s Important
With recruitment processes becoming longer and more drawn out in a candidate driven market, the average cost per hire for organisations is steadily rising. If you work in talent acquisition and are looking to recruit new talent for your business, understanding how to calculate the cost per hire is going to be crucial – allowing you to budget effectively for recruitment, cut costs where appropriate, and help you to invest more to bring in the right employees at the right positions.
Striking the right balance during the recruitment process can be difficult, but is increasingly necessary in the current market, where remote working options can see businesses from all around the country – and even internationally – compete for the same pool of talent. We are also seeing a talent shortage in the UK, with vacancies outpacing the supply of workers. With the labour force shrinking, owing to older workers leaving the workforce, younger people choosing to stay in education for longer periods, and many people choosing to leave the UK, recruiter efficiency is more important than ever.
Cost per hire then, is one of the most important metrics to consider as you look to bring in new employees.
What is cost per hire?
Very basically, the cost per hire (CPH) is the amount of money your organisation spends on average to hire a new employee. It is a recruitment metric, measuring the associated costs for making a new hire. This can include external recruitment costs such as agency fees, as well as internal recruiting costs.
Cost per hire then, is the total amount of budget your organisation will spend on making a new hire.
These costs apply to those newly recruited from outside your organisation, but also to those who have been promoted or transferred to new roles within the business.
There are also numerous factors that will impact on the total cost per hire, including the efficiency of your in-house recruiting team, the size of your organisation, and the seniority and salary of the position being filled.
Why should you measure cost per hire?
Measuring CPH can give organisations an advantage in an increasingly candidate-driven market. Namely, understanding the total cost per hire allows your recruitment teams to spend more efficiently – creating and adhering to budgets, and eliminating any wasteful or unnecessary spend during recruiting.
It can also shine a light on areas where money – and time – can be saved. It’s a metric that could demonstrate how much more costly it is using external agencies vs in-house teams and thus justify investing more in your internal talent acquisition team.
Benchmarking your CPH by department and position type allows you to see which areas of the business require more investment, and for your organisation to make more informed decisions around how much it can and should invest for certain roles.
You can also compare the cost per hire against the source of hire to gain a better understanding of which job boards work best – you may find that free job boards provide the most cost effective solution, or that using paid advertising significantly reduces the time to hire. If you are using an Applicant Tracking System, you’ll have a wealth of reporting tools and analytics at your fingertips to gain a clearer picture of how these different metrics compare.
How to calculate cost per hire
With Hireserve ATS, employers are easily able to capture and use data on recruitment to calculate the overall costs. But otherwise, the manual process of calculating CPH can be time-consuming, but not impossible.
Very simply, add the total internal recruiting costs to the total external recruiting costs and then divide by the total number of hires.
Internal costs will include:
- Recruiter salaries
- Interview costs
- Learning and development costs
- Employee referral schemes and bonuses
External costs will include:
- Agency fees
- Recruitment technology spend
- Advertising costs on jobsites
- Travel expenses
Once you have the total of your expenses, this is then divided by the number of hires your organisation has made to reach the average cost per hire.
This total number of hires can be measured differently by different companies, but as a rule, include any new hire, full-time or part-time who has been through a hiring process lead by a hiring manager, or who has a fixed-term contract for more than a year.
When calculating the CPH, you can exclude internal transfers, employees gained through mergers or acquisitions, or consultants or contractors.
Organisations can then measure the total number of hires over several different time frames – annually, quarterly, or monthly – to gain more understanding of how and where money is being spent, where it can be reduced, and ultimately, where investment is most beneficial to an organisation.
The importance of measuring cost per hire
While there are numerous valuable metrics for a recruiter to consider, CPH is becoming increasingly valuable in a world still feeling the effects of COVID-19. While it is only one piece of the puzzle, it does provide valuable insight in a candidate-driven market. Tracking both internal and external recruitment costs are necessary to understand the value of the recruitment process.
It is not necessarily true that a high cost per hire is a bad thing – it could be that you have invested in hiring high quality talent in important positions within your organisation at higher salaries. These candidates could be more expensive and take longer to hire. This might be a sign of your company’s commitment to investing in people. But it just as easily could show that you are not investing in the right people in the right places or failing to nurture the talent already within the organisation.
But if your organisation wants to spend money with quality in mind, that starts with understanding the CPH and empowering your recruitment teams to optimise their hiring process and locating the most valuable areas for investment to automate and streamline recruitment.
Are you ready to upgrade your recruitment? Book a demo to see what Hireserve ATS can do for your organisation.