Talent Acquisition

How to Calculate Your Cost Per Hire

Finding and hiring new talent is an investment that involves planning and budgeting. Understanding how to calculate the recruitment metric cost per hire will give you a crystal clear idea of your recruiting process’s internal and external expenses. Even better, the formula for calculations is pretty straightforward.

What Is Cost Per Hire?

Cost per hire is a key performance indicator (KPI) that averages the total cost for a company to hire a new employee. This HR metric doesn’t include starting salary, benefits, and training. Instead, it calculates all the internal and external expenses associated with recruitment, providing you with a comprehensive overview of the financial resources allocated to talent acquisition. 

Various reports share that the average cost per hire for U.S. companies is around $4,700. This amount varies based on industry, position, and location. For example, hiring an executive costs about 180% more than hiring an entry-level employee. The percentage could be even higher in major cities.

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The Cost Per Hire Formula

Calculating involves assessing the total amount spent. These costs are then added to create a total recruitment cost divided by the number of people the company hires in a given period.

The standard cost-per-hire formula is as follows:

(Internal Costs + External Costs) / Total Number of Hires in a Given Period = Cost Per Hire

For instance, if your annual internal recruitment costs are $120,000, your annual external recruitment costs are $240,000, and you hired 100 people that past year, then you would calculate cost per hire as follows:

($120,000 + $240,000) / 100 = $3,600 CPH

“Before COVID-19, companies spent more on interview-related travel expenses than they do now since much of that has shifted to cost-effective virtual meeting tools.”

– Marisa Ramirez, Wizehire Director of People Ops

Internal and External Cost Per Hire Expenses

Recruitment expenses often include advertising fees, internal referral bonuses,  background checks, and sometimes the value of the hiring manager’s time spent on the interview process, which takes away from their actual job. 

Understanding all expenses provides an accurate calculation that will help optimize recruitment processes, reduce costs, and boost hiring efficiency.

Internal Costs

Examples of internal costs to analyze:

  • recruiter salaries and benefits
  • employee referral incentives
  • employee onboarding
  • technology and software

External Costs 

Examples of external costs to analyze:

  • outsourced recruiter fees
  • job board and advertising fees
  • sign-on bonuses
  • background checks 
  • recruitment events
  • consulting and legal fees
  • third-party hiring platforms
  • pre-employment assessments
  • travel expenses

Here is what a breakdown of recruitment costs for a company might look like using our hypothetical numbers from earlier:

Internal CostsCost in USD
Training$60,000
Referral Incentives$30,000
Administrative Costs$30,000
Total$120,000
External CostsCost in USD
Advertising Fees$60,000
Background Checks$30,000
Drug Tests$10,000
Third-Party Services$50,000
Travel Expenses$50,000
Recruitment Events$40,000
Total$240,000

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Why Is it Important to Calculate?

Now that you know how to calculate cost per hire and which factors affect the final number, you may wonder why keeping track of your CPH is essential. 

Calculating allows you to accurately forecast and allocate recruitment budgets while assessing strategies and uncovering strengths and weaknesses.

With accurate KPI data, you can also benchmark against industry standards and competitors. If your CPH is high, you can audit your resources and identify cost-saving opportunities, such as renegotiating vendor contracts, streamlining internal processes, or investing in more cost-effective technology.

How to Improve Your Cost Per Hire

How do you know if your cost per hire is too high? First, the average cost by industry ranges from $1,000 to $6,000, with most hospitality jobs on the low end and professional jobs on the high end.

If your CPH is higher than industry averages, investigate where the excess money is being spent and which costs can reasonably be reduced or cut. Just remember, new employees are investments. If hiring a quality candidate means sacrificing a lower CPH, it is likely worth the extra expense.

If your cost per hire is higher than you’d like, there are several strategies you can use to reduce expenses while maintaining the quality of your hires.

  1. Use applicant tracking systems like Wizehire and other technology tools to save time and resources on administrative tasks.
  2. Tap into employee referrals—according to Wizehire’s Small Business Report, it is a highly effective form of recruiting.
  3. Use strategies that speed up the hiring process—shorten the time to hire and the time to fill metrics to reduce costs.
  4. Develop a strong employer brand to attract candidates and reduce reliance on expensive recruitment methods.
  5. Monitor recruitment methods frequently to identify inefficiencies and implement improvements.

Wize Words

Cost per hire is a transformative metric that impacts how you attract, select, and onboard talent. Calculating and tracking your recruitment budget can streamline hiring processes and control costs. Remember, hires are an investment. Optimizing your cost per hire means cutting expenses and smartly allocating resources to secure quality candidates.

Frequently Asked Questions

How often should I calculate the cost per hire?

Consistently calculating CPH, quarterly and annually, helps you monitor fluctuating costs and evaluate changes made to the hiring process. Budgets, employee retention, turnover, and job markets are constantly in flux, so keeping tabs on your company’s cost per hire gives you an idea of what kind of talent you can afford to bring on board.

What is the cost of a bad hire?

Bad hires result in additional expenses, decreased productivity, and disruptions to team dynamics. The company will bear the burden of recruitment costs and, in some instances, severance packages and possible harm to its reputation if the employee decides to leave bad reviews on sites like Glassdoor. In a nutshell, a lousy hire heavily affects the bottom line, which makes investing in the search for quality talent all the more critical.

What is the difference between cost per hire and cost of hire?

The cost of hire is the total amount of money used to recruit and onboard a new employee. Cost per hire represents the average expenses incurred by a company for each hire made within a specific period. This provides a standardized metric to help evaluate recruitment efforts, allowing you to make comparisons across different periods or organizations.

Author

  • Anna Petron

    Anna Petron is a professional writer with several years of communication and brand storytelling experience across a spectrum of businesses. She's intrigued by trends that constantly shift and affect recruitment and workplace culture, and she provides practical solutions for organizations looking to enrich their internal structure.

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The article was reviewed by Deirdre Sullivan

Anna Petron

Anna Petron is a professional writer with several years of communication and brand storytelling experience across a spectrum of businesses. She's intrigued by trends that constantly shift and affect recruitment and workplace culture, and she provides practical solutions for organizations looking to enrich their internal structure.

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