What is Cost per Hire and How to Calculate it?

Cost per hire is a critical recruiting metric for any organization looking to optimize its recruitment process and make informed hiring decisions. Understanding the cost per hire helps HR professionals and hiring managers evaluate the efficiency and effectiveness of their recruitment strategies. 

In this article, we will explore how to calculate the cost per hire and its importance in the hiring process.

What is Cost per Hire?

Before delving into the calculation, let's first define what cost per hire actually means. Cost per hire is a key recruitment metric that determines the average expenses associated with hiring new employees in an organization. 

These costs comprise recruitment advertising, sourcing, onboarding, referral bonus program expenses, and any other costs directly related to the hiring process. Using the cost per hire metric provides valuable insights into the effectiveness and efficiency of a company’s recruitment process.

It allows HR professionals and hiring managers to assess whether the recruitment efforts are optimized and within budget.

What is the importance of cost per hire?

Measuring the cost per hire is a vital practice for organizations seeking to streamline their recruitment processes and optimize their hiring strategies. By understanding the financial implications of acquiring new talent, HR professionals can make informed decisions and contribute to the overall success of the organization. 

Here are some key reasons why measuring cost per hire is important:

Performance Evaluation: 

Measuring the cost per hire provides valuable insights into the efficiency and effectiveness of your recruitment efforts. By comparing the cost per hire with the quality of hires made, you can determine if your recruitment strategy is yielding the desired results. 

This allows you to identify areas for improvement and make data-driven decisions to enhance your hiring process.

Return on Investment (ROI) Analysis: 

Understanding the cost per hire allows you to calculate the ROI of your recruitment activities. By assessing the expenses involved in acquiring new talent and comparing it to the value these hires bring to the organization, you can determine the overall success of your recruitment investments. 

This enables HR teams to optimize their spending and allocate resources more strategically.

Cost Control: 

Measuring cost per hire helps HR departments identify unnecessary expenditures and optimize their recruitment budget. By breaking down the various components of the hiring process, such as advertising, candidate sourcing, and interviews, you can pinpoint areas where costs can be reduced without compromising on the quality of hires. 

This cost control is crucial, especially during times of economic uncertainty or budget constraints.

Enhancing Recruitment Strategy: 

The data obtained from cost per hire analysis can be used to refine and tailor your recruitment strategy. For instance, if certain sourcing channels are proving to be more cost-effective, you can focus your efforts on those channels. 

Similarly, if specific stages of the hiring process are driving up costs, you can devise strategies to streamline those stages and minimize expenses.

Continuous Improvement: 

Regularly measuring cost per hire allows HR teams to track recruitment outcomes, and analyze the impact of process changes made to the recruitment strategy. It fosters a culture of continuous improvement by enabling HR professionals to experiment with different approaches and evaluate their outcomes. 

This data-driven approach ensures that the recruitment process evolves over time, becoming more efficient and cost-effective.

Benchmarking against Industry Standards: 

Calculating the cost per hire and comparing it to industry benchmarks enables organizations to gain valuable context and insights into their hiring practices. Understanding how your organization's cost per hire compares to industry averages allows you to gauge the competitiveness and efficiency of your recruitment process. 

If your cost per hire is significantly higher than the industry average, it may indicate inefficiencies or areas that require improvement. Conversely, if your cost per hire is lower than the industry average, it could suggest that your recruitment process is particularly effective. 

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How is Cost per Hire Calculated?

To calculate the cost per hire, you need to consider several cost components associated with the recruitment process. 

Let's break them down:

1. Internal Recruiting Costs

Internal recruiting costs are the expenses incurred by the company's internal HR team or recruitment department. 

These costs may include:

• Salaries and benefits of in-house recruiters
• Marketing and advertising costs for job postings on the company website
• Interview costs (number of hours times hourly salary of interviewer or hiring manager)
• Fixed costs such as physical infrastructure

2. External Recruiting Costs

External recruiting costs, on the other hand, are expenses incurred when seeking external assistance to fill a position. 

These costs may include:

• Fees paid to external recruitment agencies
• Costs of conducting background checks and pre-employment assessments
• Advertising costs
• Technology costs (Recruitment software and tools)
• Career fair / recruiting event costs

External recruiting costs can also include candidate-related costs such as:

• Travel costs (Travel expenses for candidates during the hiring process)
• Relocation costs
• Signing bonuses
• Cost per hire by category

3. Onboarding Costs

Onboarding costs refer to the expenses related to integrating a new employee into the organization. 

These may include:

• Training and orientation expenses
• Onboarding materials and resources

Additionally, onboarding costs, opportunity costs, and the hiring manager's time spent on interviews should also be factored in. 

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Cost per Hire Formula

The cost per hire is calculated by dividing the sum of all recruiting costs, both internal and external, by the total number of hires in a specific time period. 

To illustrate the calculation, let's assume your company spent $150,000 on recruiting efforts over a year, and within that period, 75 new employees were hired. 

The steps to calculate your cost per hire are as follows:

Step 1: Determine the total recruitment costs for the year.

Total Recruitment Costs = $150,000

Step 2: Calculate the cost per hire.

Cost per Hire = Total Recruitment Costs / Number of Hires

Cost per Hire = $150,000 / 75

Cost per Hire = $2,000

In this example, the cost per hire is $2,000. This means that, on average, the company spent $2,000 for each new employee hired during the year. 

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How Do I Calculate Cost per Hire in Excel?

Now that we have a clear understanding of the cost components and how to calculate it using the formula, let's go through the step-by-step process of calculating the cost per hire using Microsoft Excel:

Step 1: Gather Data

Collect all the necessary data from various sources, including internal HR records, external agency invoices, and onboarding expenses.

Step 2: Sum Up Costs

Create a spreadsheet in Excel and list all the cost components. Then, sum up the costs under each category.

Step 3: Determine the Number of Hires

Identify the total number of hires made within a specific time frame, whether it's monthly, quarterly, or annually.

Step 4: Calculate Cost per Hire

To calculate the cost per hire, use the following formula:

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Final Thoughts

The cost per hire metric goes beyond just numbers and spreadsheets; it empowers HR professionals and hiring managers to see the bigger picture. It also promotes a culture of continuous improvement within HR departments. 

Regularly tracking and evaluating recruitment costs allows organizations to adapt and evolve their strategies to meet changing demands and market conditions. It encourages experimentation with different approaches, channels, and recruitment techniques, leading to enhanced efficiency and better talent acquisition outcomes.

Hence, cost per hire is not just a metric; it is a catalyst for progress. It enables organizations to align their recruitment practices with their overarching business goals, ensuring they have the right people in the right positions at the right cost. 

By embracing the data-driven insights provided by cost per hire analysis, companies can build a more robust and successful hiring process that drives growth and long-term success.

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