How to calculate cost-per-hire to enhance your recruiting

When an organization decides to hire new employees, it incurs certain costs associated with the recruitment process. These expenses include agency fees, job board advertisement fees, interviewer compensation, and a diverse range of other expenses.

Since these costs typically do not generate revenue for the organization, it is only logical to understand how much it costs to hire employees and implement measures to reduce spending during recruitment. As a result, understanding how to calculate the cost per hire (CPH) and taking action to improve it is pivotal.

What is Cost Per Hire?

Cost Per Hire (CPH) is a metric used by organizations to measure the total cost associated with hiring a new employee. It represents the sum of all the expenses incurred during the recruitment process. 

The expenses can include job advertising, recruitment agency fees, applicant tracking system software, pre-employment testing, background checks, travel expenses, and any other costs associated with the hiring process.

By tracking the cost per hire, organizations can evaluate the effectiveness of their recruitment strategies and identify areas where they can reduce expenses. A low CPH is generally desirable as it indicates that an organization is recruiting efficiently and cost-effectively. However, a very low CPH may indicate that an organization is cutting corners in its recruitment process, which can lead to hiring mistakes and high turnover rates.

How to calculate cost per hire

According to the Society for Human Resource Management (SHRM), the standard cost per hire formula 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.

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What are internal costs?

Internal costs are expenses related to internal staff and organizational costs of the recruitment function. Essentially, the internal cost is the amount of money spent inside the organization during the hiring process. These include:

• HR salaries
• Employee referral bonuses
• Interview costs (# of hours X hourly salary of interviewer or hiring manager)
• Fixed costs such as physical infrastructure (e.g., office rental, computer devices, phones, etc.)

What are external costs?

External costs are expenses that are incurred by external vendors or individuals during recruiting. These include:

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

How to calculate the total number of hires?

As there isn't a definite method to calculate the total number of hires, the organization determines how they intend to measure the total number of hires. The company's prerogative is deciding whether to include part-time employees when calculating the total number of hires.

Why is cost per hire a vital metric to monitor?

Cost per hire is an important metric to monitor because it provides insight into the efficiency and effectiveness of an organization’s recruitment process. It allows companies to understand how much they’re spending on each new employee, from job posting to onboarding. By tracking a cost per hire over time, companies can identify areas where they can reduce costs and improve their recruitment process.

Here are a few reasons why cost per hire is an important metric to monitor:

• Helps to optimize recruitment spending: By tracking a cost per hire, companies can identify areas where they are spending too much on recruitment activities. This allows them to make data-driven decisions to optimize their recruitment spending.
• Helps to identify recruitment inefficiencies: A high cost per hire may indicate that a company’s recruitment process is inefficient or they aren’t attracting the right people. By identifying these inefficiencies, companies can make changes to improve their recruitment process. 
• Gives insight into the effectiveness of talent acquisition: Cost per hire can also provide insight into the effectiveness of a company’s talent acquisition efforts. If a company is constantly hiring high-quality talent with low recruitment costs per hire, it means that its recruitment process is effective.

Overall, tracking a cost per hire is a valuable metric for companies looking to optimize their recruitment process.

Best practices to improve cost per hire

Reducing the cost per hire is essential for companies to optimize their recruitment process and increase their profitability. Here are some best practices that can help improve the cost per hire:

• Use a targeted recruitment strategy: Identify the best channels to reach potential candidates for your specific role, and focus your recruitment efforts on those channels. This can help you avoid spending money on expensive job boards and recruitment agencies.

• Referral programs: Employee referrals can be a great way to attract high-quality candidates at a low cost. Consider offering incentives to employees who refer successful hires.

• Use social media: Social media platforms are great for reaching out to potential candidates and building your employer brand. Utilize platforms like LinkedIn, Facebook, Twitter, and Instagram to post job openings and attract candidates.

• Optimize your job descriptions: Ensure that your job descriptions are clear, concise, and compelling. Use relevant keywords and highlight the most important qualifications and responsibilities to attract the right candidates.
• ‍Track and measure your recruitment efforts: Analyze your recruitment metrics regularly to identify areas for improvement and adjust your recruitment strategy accordingly. This can help you identify which channels and strategies are most effective at reducing the cost per hire.

How Skuad can help automate your recruitment process

One of the easiest ways to improve your cost per hire is by utilizing an Employer of Record (EOR) solution. 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.

To know more about Skuad, book a demo today!