How to Calculate Cost per Hire in 3 Steps: Tips and Formula
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Human resource (HR) departments and recruiters may track various metrics, such as cost per hire, to analyse whether they're using resources appropriately. This value can provide recruiters with valuable insights and help them make smart fiscal decisions for the organisation overall. If you work in HR, understanding what this value is and how to measure it can ensure you're using hiring strategies that benefit the company you work for. In this article, we explain how to calculate cost per hire, provide a formula to help you do so, describe what it is and consider why it is important.
What is cost per hire?
Cost per hire is the recruitment cost a business incurs for every person it hires. For example, if a company hires 300 people a year, and the average expenditure per hire is $2,500, then it would spend an average of $750,000 that year. Understanding this process helps you track hiring costs annually to compare any changes. Calculating cost per hire involves gathering the expenditure amounts from software, advertising and relocation expenses. You can evaluate cost per hire according to an individual department's metrics or those of an entire business.
The cost per hire formula allows companies to evaluate this business metric according to a particular fiscal period, such as monthly, quarterly or annually. This helps them evaluate their recruitment spending on a larger or smaller scale, depending on their business needs and interests. The cost per hire formula is:
Cost per hire = (Internal recruiting costs + External recruiting costs) / Total number of hires for a particular fiscal period
How to calculate cost per hire
Follow this list of three steps to learn how to calculate cost per hire for the company you work for:
1. Evaluate internal costs
Internal costs include expenses that internal staff processes require for a business or department to function. You also consider internal capital, which is the available funds from within the company, when calculating internal costs. Other internal costs may include:
Recruitment employee salaries: Recruitment employees create a portion of the costs for internal hiring. This category includes salaries, bonuses and other compensation methods for recruitment staff.
Hiring manager salaries: Hiring managers who oversee recruitment employees also create a portion of internal hiring costs. In addition to any commission-based bonuses, internal costs for hiring manager salaries also cover any other bonuses or seasonal increases throughout the year.
Development costs for recruitment teams: Because a department or business often builds upon its existing recruitment team, any development costs accrued as the organisation grows count as internal costs.
2. Assess external costs
External costs include company expenses related to external organisations, such as vendors and hiring and recruitment personnel. This means finding and hiring new employees is an external cost for a company. These costs may include:
External agencies: Third-party agencies are businesses a company hires to help promote a job listing so that more candidates may apply for a position. Their fees may cover advertising in the local newspaper, a TV commercial or networking.
Job boards: Job board sites commonly charge companies for posting openings to ensure a wider range of candidates learn about the employment opportunity. As this is usually an annual fee, tracking this expenditure may require you to divide the usage cost by the calculation period rather than analysing it per post.
Aptitude test fees: If a company requires applicants to take aptitude tests before the interview process begins, it may pay fees for anatomised tests and proctoring. This ensures candidates possess certain skills and technical knowledge before progressing in the hiring process.
Assessment centre fees: Assessment centres help companies determine whether applicants are good candidates for positions by offering space to test, interview and discuss job details. If a company uses an assessment centre, part of its external recruiting costs may be annual fees.
Background checks: External costs can include background checks an HR department completes to learn more about candidates' legal records and history. This could become a significant expense depending on the number of applicants, so it may be beneficial to evaluate which roles require this level of information prior to hiring.
Drug tests: A hiring department's expenses might include the cost of paying a third party, such as a laboratory, to administer and analyse candidates' drug tests. Evaluating the application pool using a drug test ensures that the company hires responsible employees who abide by its standards and requirements.
Recruitment events: While recruiting during career fairs and other such events typically requires an entry fee, applicants who attend could have valuable skills. Career fairs and informational workshops commonly occur near university campuses, making attendance potentially worth the expense.
Applicant tracking fees: Third-party software for tracking application responses and applicant resumes can be a considerable expense in external recruiting costs. Therefore, consider organising the software so it includes only those elements most valuable to the recruitment process.
3. Use the formula to calculate cost per hire
After determining the total of both internal and external costs, use the cost per hire formula to calculate this metric for the recruitment team. Divide the sum of these values by the total number of hires for a particular fiscal period. For example, you can calculate the cost per hire for a particular month or an entire year. When identifying the number of new hires, include both full- and part-time employees and individuals that the company hired both internally and externally.
Why is it important to calculate cost per hire?
Cost per hire is an important metric to measure because it allows an organisation to track the cost-effectiveness of their recruitment and hiring processes. The cost per hire formula allows companies to determine whether their recruitment efforts provide a higher return on investment (ROI) and generate a profit for the company. It can reveal information about organisational spending and show whether the hiring department allocates resources to the appropriate tasks and initiatives. This can help hiring departments better use their time and materials by optimising their approach to recruitment and minimising costs from ineffective strategies.
Tips for calculating cost per hire
Here's a list of tips to help you accurately calculate a department's cost per hire:
Perform the evaluation regularly
Increase the accuracy of your cost per hire evaluation by performing this calculation frequently. This could help you include all internal and external costs, especially elements that are unique or change often. By regularly evaluating the recruiting department's cost per hire, you can also analyse the performance of a new hiring strategy and evaluate whether it's worth the additional cost and resources. For example, if a company has high turnover rates, this metric can help them analyse the recruitment process and decide whether it would be beneficial to improve.
Analyse each department
If you're calculating cost per hire for an entire business, consider doing smaller departmental evaluations instead. Some departments could require hiring process adjustments, while others might benefit from the current hiring process. Departments may have different reasons for increased or decreased quality of hire, making consistent and individual evaluations important for the entire business.
Use this metric to implement new strategies
Utilise the information from calculating the cost per hire to make decisions about new hiring strategies and future approaches to recruiting. Using the collected data can reduce employee turnaround rates and organisational costs. The HR department may also make realistic predictions regarding cost per hire and strategic decisions depending on their resources and cost options.
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