In order to understand how efficient your hiring process is, you need to know several metrics including quality of hire and time to hire. Another crucial metric is cost per hire, and it directly reveals the money you spend to keep your team staffed. But how can you calculate cost per hire? And what can you do to optimize it? In this article, we’ll explore this important measurement and how it fits into your hiring process.
Cost Per Hire (CPH) Defined
The cost per hire metric is the average amount of money your company spends on each new hire. It’s a valuable tool in budgeting for an upcoming bump in hiring, such as when staffing for the holidays. It can also tell you if there are inefficiencies in your talent acquisition process, especially if the number fluctuates greatly from year to year.
How to Calculate Cost Per Hire
If you want to calculate cost per hire, use this simple formula:
- Take your external costs and add them to your internal costs.
- Divide this total by the total number of hires you made in a given time period (typically 12 months).
- This new number is your average cost per hire.
What are Internal Hiring Costs?
The hiring manager’s salary, along with the time from other departments for interviews and meetings, makes up a portion of this number. Make sure to also include any employee referral bonuses and the office space used specifically for hiring, such as a conference room.
External recruiting costs are those that accrue outside of the office, such as advertising, career fair expenses, background checks, and anything paid to outside vendors or service providers such as recruiters. Any accommodations you make for candidates to visit, such as hotel stays or meals, are also included in this number.
What is a Good Benchmark for Cost Per Hire?
While each industry will have a different “normal,” the U.S. average for cost per hire is $4,000. This number is a bit of an estimation because it includes so many soft inputs. Your geographical location will affect the number, as well as the type of role you are trying to fill. A more skilled position, such as an engineer, may take more to hire than an entry-level customer service representative. Also, a corporate headquarters in New York may spend more than a satellite office in the Midwest.
These large swings in cost are why many HR professionals calculate an average cost per hire by department or office. You should also consider the return on investment in addition to the actual cost per hire. You may find that it’s worth spending more for a highly sought-after professional with a very specific skill set. Even if your number rises above the average, the payoff could be great enough to allow for this one-time fluctuation for the best talent.
How Much Does it Cost an Employer to Hire?
As mentioned, the dollar amount spent on a new hire will range widely due to a number of factors. A benchmark of $4,000 may be a good goal during a time of high unemployment, but it may be unrealistic when no one is looking for work.
Compliance is another factor to consider when you’re wondering, “How much does it cost an employer to hire someone?” Mistakes can be costly, and we don’t often like to look at things like lawsuits or bad hiring practices as having a dollar cost. With employers losing $404 million in Employment Opportunity Commission settlements every year, HR teams cannot afford to ignore this.
A high turnover rate is also worth thinking about. If you focus too much on the cost to hire, it’s possible that hasty decisions will be made in the interest of saving time and money. A bad hire is expensive. It can cost up to six months of a position’s yearly salary to replace that employee and get them fully trained, which is often overlooked in calculating cost per hire.
You don’t want to ignore opportunity costs as well. By trying to save money, it’s tempting to hire the first good candidate that comes your way. By not holding out for the best, however, you risk missing out on top performers. The same happens when your hiring process is too slow or disorganized. Turning off star employees with a messy hiring path isn’t something you can afford.
Best Practices for Cost Per Hire Data and How to Use it
What can you do with your cost of hire data? Here are several ways you can use it to your advantage:
- Review the data regularly to see if it rises dramatically in a short period of time. This can alert you to trouble in a department or to a bottleneck in your hiring process.
- Narrow down data by department and role. If there is a staggering cost for a single job title, it may be for a good reason. Some roles cost more to hire. If there isn’t a good reason, consider how hiring for this role is different and why the costs are rising.
- Consider the source of hire. Are you finding that it costs more to hire from ads placed on online job boards? Is it cheaper to find candidates through job fairs or recruiters? While cost shouldn’t be the only thing you look at, it’s vital in identifying the best ROI for specific talent channels.
- Use cost of hire data for predicting future costs. Most importantly, you can create realistic budgets for holidays or busy seasons using this data. Even an exaggerated cost of hire can help soften the blow of adding staff and help you find the funds to do it well.
The rules for how to use cost of hire data are up to you. If you’re not already capturing this data, that’s the first place to start.
Comeet’s Applicant Tracking System makes it easy to stay on top of this data. Once the data is tracked, you can carefully assess if there is room to cut costs or address inefficiencies. Learn more about how we can help today!