What is a cost per hire?
Definition: Cost per hire (CPH) is a key metric used in human resources to measure the total cost associated with hiring a new employee.
This metric includes all expenses related to the recruitment and onboarding process and helps organizations understand the financial impact of their hiring practices. Calculating cost per hire allows companies to evaluate the efficiency and effectiveness of their recruitment processes, budget for future hiring needs, and identify areas for cost reduction.
Components of Cost per Hire
Cost per hire encompasses a variety of direct and indirect expenses, which can be categorized as follows:
1. Advertising and Marketing Costs:
- Job postings on online job boards, company websites, and social media platforms.
- Costs associated with recruitment advertising in newspapers, magazines, and other media.
- Expenses for creating and distributing recruitment marketing materials.
2. Agency and Staffing Fees:
- Fees paid to recruitment agencies or staffing firms for sourcing candidates.
- Costs associated with headhunters or executive search firms.
3. Employee Referral Program Costs: Bonuses and incentives provided to employees for referring successful candidates.
4. Internal Recruitment Costs:
- Salaries and benefits of internal recruiters and HR staff involved in the hiring process.
- Costs related to recruitment software, applicant tracking systems (ATS), and other tools used to manage the hiring process.
- Office space, equipment, and supplies used for recruitment activities.
5. Travel and Interview Costs:
- Expenses for candidate travel and accommodation for interviews.
- Costs for recruiter travel and accommodation if attending job fairs or recruitment events.
- Interview-related expenses such as venue rental, refreshments, and materials.
6. Background Checks and Assessments:
- Costs for conducting background checks, drug tests, and other pre-employment screenings.
- Expenses for skills assessments, psychometric tests, and other evaluation tools.
7. Onboarding and Training Costs:
- Costs associated with new employee orientation and onboarding programs.
- Expenses for initial training and development activities.
Calculating Cost per Hire
To calculate cost per hire, the total recruitment expenses are divided by the number of hires made during a specific period. The formula is as follows:
Cost per Hire (CPH) = Total Recruitment Costs / Number of Hires
Example Calculation
Suppose a company incurred the following recruitment costs over a year:
- Advertising and marketing: $10,000
- Recruitment agency fees: $20,000
- Internal recruitment costs: $30,000
- Travel and interview expenses: $5,000
- Background checks and assessments: $2,000
- Onboarding and training: $8,000
The total recruitment costs would be:
Costs=$10,000+$20,000+$30,000+$5,000+$2,000+$8,000=$75,000
If the company hired 25 employees during this period, the cost per hire would be:
Cost per Hire (CPH) = $ 75,000 / 25 = $3,000
FAQ
Why is cost per hire important?
Understanding cost per hire is important for several reasons:
- It helps in budgeting and financial planning for recruitment activities.
- It provides insights into the efficiency of the recruitment process.
- It allows for benchmarking against industry standards and competitors.
- It aids in making informed strategic decisions related to hiring practices.
How can cost per hire be reduced?
Cost per hire can be reduced by:
- Streamlining the recruitment process to eliminate unnecessary steps and expenses.
- Leveraging employee referral programs to reduce advertising and agency fees.
- Utilizing cost-effective recruitment channels like social media and job boards.
- Investing in recruitment technology to automate and optimize hiring processes.
- Improving the efficiency of internal recruitment teams through training and development.
How often should cost per hire be calculated?
Cost per hire should be calculated regularly, such as quarterly or annually, to provide ongoing insights into the recruitment process and to identify trends or areas for improvement.
What is a good cost per hire?
A good cost per hire can vary widely depending on the industry, company size, and location. Organizations should compare their CPH with industry benchmarks and their own historical data to determine what is reasonable and achievable for them.
How does cost per hire relate to other recruitment metrics?
Cost per hire is one of several key recruitment metrics. It should be considered alongside other metrics such as time to fill, quality of hire, and retention rates to provide a comprehensive view of the recruitment process’s effectiveness and efficiency.
Can cost per hire vary by job type or level?
Yes, cost per hire can vary significantly by job type or level. For example, hiring for senior executive positions typically involves higher costs due to the use of executive search firms and more extensive assessment processes. In contrast, entry-level positions may have lower associated costs.
How can technology help in managing cost per hire?
Technology can help manage cost per hire by:
- Automating administrative tasks, reducing the time and resources needed for recruitment.
- Providing data analytics to track and analyze recruitment costs.
- Enhancing candidate sourcing and screening processes to improve efficiency.
- Facilitating better communication and collaboration among recruitment team members.
How does cost per hire impact overall business performance?
Effective management of cost per hire can lead to significant cost savings for the organization, improving overall business performance. By optimizing recruitment processes and reducing unnecessary expenses, companies can allocate resources more effectively and achieve better financial outcomes.