Calculating cost per hire and how to improve it

Introduction

When organizations make plans to hire employees, they incur certain costs related to the recruitment processes. These costs include the agency fees, job board advertisement fees, the interviewers’ compensations, and a lot more. 

Typically, these costs do not generate any income for the organization, so it is only logical to know how much it costs to hire employees and put measures to minimize spending in the recruitment process. Therefore, it is essential to understand how to calculate the cost per hire (CPH) and take action to improve it.

What is Cost Per Hire?

Cost per hire is an essential recruitment metric. It refers to the total expense involved in bringing new employees to the organization. These costs include money spent on placing job ads, agency fees, travel costs, and the hiring manager’s fees.

Keeping tabs on this recruitment metric enables companies to evaluate their recruitment expenses annually. By analyzing the annual cost per hire, organizations can discover what works for them and make data-driven decisions regarding their hiring strategies. In addition, the companies can use the information to improve their budget planning and optimize to achieve much better recruitment results while spending less.

How to calculate the cost per hire

According to the Society for Human Resource Management (SHRM), the standard formula for calculating the average cost per hire is the sum of the total cost per hire (both internal and external) and dividing the sum by the total number of hires within a specific time frame.

Internal costs

As defined by the Society for Human Resource Management (SHRM), the internal costs factor refers to the expenses attributed to the internal staff, organizational costs, and capital of the recruitment function. Essentially, the internal cost is the amount of money spent inside the organization during the hiring process.

The internal costs include:

• HR salaries
• Employee referral bonuses
• Hardware infrastructure costs (this includes computer devices, phones, office space costs, etc.)
• Software infrastructure costs (this includes Applicant Tracking System, Virtual meeting software, Online examination system, etc.)

External costs

The American National Standard for calculating cost per hire defines external costs as expenses incurred by the external individuals during the recruitment process. External costs are expenses related to the external recruiter fees, job ad posting costs, and every other payment towards the recruitment process directed outside the organization. The external costs include:

• Cost of advertisements
• Marketing expenses (this includes conventions, campus recruitment events, career fairs, etc.)
• Agency fees
• Travel expenses
• Background checks service costs
• Assessment tests
• Relocation expenses

Total number of hires

The organization determines how they intend to measure the total number of hires as there is no definite method. The company’s prerogative is to decide whether to include part-time employees when carrying out the summation for the total number of hires.

How to improve cost per hire

The cost of hire is an invaluable metric that can be deployed to optimize your recruitment process, help save costs, and foster future strategic planning. While there are no systemic guidelines on managing the cost per hire, organizations can utilize the following methods to improve their cost per hire.

Carry out regular assessment 

Regularly examining the cost per hire will provide a comprehensive overview of how specific procedures impact or improve the recruitment process. While some systems may have increased the costs, the organization may discover that these systems are crucial to the success of the recruitment process.

Build a talent pool of qualified candidates

Every recruitment process always has several qualified and interested candidates that were not successful in the recruitment process. Therefore, documenting and building a pool of these candidates will save the organization time and money that could have been spent carrying out a full-scale recruitment process.

Have a structured employee referral program

Employees always know people that are great at specific skill sets. Harnessing the options of employees recommending the best talent is one way to get the candidates while saving the cost of carrying out a mass recruitment process. A structured employee referral program will ensure that the employees receive incentives for their recommendations and get them to work with people they love. 

Use social media

In this age, social media is an invaluable tool to disseminate information and gather data without spending a dime. Many organizations now use social media to source talent. By doing this, the organization can easily vet the candidates to know if they will be a good fit while also discovering their skill level.

Automate your recruitment process with an Employer of Record (EOR)

One of the easiest ways to improve your cost per hire is utilizing an Employer of Record (EOR) solution. An employer of record streamlines the recruitment process by acting as the employees’ legal employer on behalf of the organization, thereby taking up the responsibility of hiring and onboarding, employee payroll management, taxation, and legal compliance involved in managing the employees.  

‍Skuad can automate your recruitment process efficiently. Skuad’s Global HR Platform enables organizations to hire contractors and full-time employees in over 160 countries. By handling the organization’s entire employment lifecycle, the organization can scale its business globally with reduced cost-per-hire and less effort. Trusted by many global companies, Skuad takes the hassle out of hiring and ensures 100% compliance wherever you are hire. To know more about Skuad’s EOR solution, contact Skuad today.