When you’re looking to grow your business, it’s essential to know how much each new hire will cost. This can be tricky because there are a lot of different factors that go into calculating the cost per hire. In this blog post, we will walk you through the process of calculating cost per hire and give you some tips on how to keep it as low as possible!
What is Cost Per Hire?
Cost per hire (CPH) is a metric used to calculate the average cost your company spends on new hires. For example, if your CPH is high, it might be because you’re using inefficient or costly recruiting methods. Or, it could be that you’re hiring too many people relative to the number of openings you have. Tracking CPH can help you identify these issues so that you can make changes to your recruiting strategy.
Why Is It Important For Startups To Track This Metric?
Tracking cost per hire is an important part of the recruitment process for startups because it can help inform decisions and ensure that resources are being used to benefit the company.
By tracking a cost per hire, startups can get a clearer sense of their recruiting budget and how much they should be investing in each stage of the recruitment process. This can help them to make more informed decisions, such as whether to hire a full-time recruiter or outsource some of the recruiting tasks.
Additionally, tracking cost per hire will give startups an understanding of which methods are most effective for finding qualified candidates and ultimately reduce overall costs. Finally, by tracking a cost per hire, startups can better understand their recruiting ROI and ensure they are making the most of their resources. Knowing where the money is being spent and what the return on investment looks like will help them to make informed decisions about how to allocate resources best to achieve their hiring goals.
How do you calculate Cost Per Hire?
To accurately calculate Cost Per Hire, you must first collect all relevant data related to internal and external costs. Once gathered, determine the period of time over which the calculation should be carried out – be it monthly, quarterly, bi-annually or annually. You can further narrow down the calculation to cost per hire per department or even role. To calculate Cost Per Hire, you can go through a four-step process, which we will demonstrate with an example.
Here is the formula:
( Internal Recruiting Costs + External Recruiting Costs ) / total # of hires = Cost per Hire (CPH)
Step #1 – Gather the cost data
To accurately budget for recruitment expenses, the first step is to request a detailed expense report from the finance team. This should cover a specific period of time and should be as precise as possible in breaking down costs allocated to the recruitment team. The report will serve as a useful tool for determining your budget and cost-effectiveness.
Step #2 – Identify the internal costs
For Exxaro Incorporated, an insurance company, it is important to capture all internal recruiting costs in one column of a spreadsheet. To do this, calculate the cost of activities such as job postings, internal applicant tracking systems and any other recruitment-related software.
October
| Internal costs | Costs in USD |
| Cost of sourcing | 2,000 |
| Recruitment team costs | 4,000 |
| Compliance costs | 500 |
| Office equipment | 500 |
| Total cost | 7,000 |
Step #3 – Identify your external costs
Capture all the external recruiting costs in one column:
October
| External costs | Costs in USD |
| Background checks | 2,500 |
| Pre-screening expenses | 1,000 |
| Sourcing expenses | 2,000 |
| Technological expenses | 4,000 |
| Agency fees | 2,000 |
| Marketing costs | 5,000 |
| Total cost | 16,500 |
Step #4 – Calculation
If you have made five hires in the month of October, your final calculation when using a spreadsheet would appear as follows:
| Internal costs | 7,000 |
| External costs | 16,500 |
| Number of hires | 5 |
| Cost per hire | 4,700 |
The formula behind cost per hire is:
= (7,000 + 16,500) / 5
That’s an average cost per hire of $4,700. According to the SHRM industry average, that’s slightly above the total average:
| 25th Percentile | Median | 75th Percentile | Average | |
| Cost per hire | $500 | $1,633 | $4,669 | $4,425 |
What factors affect Cost Per Hire?
The cost per hire is affected by a variety of factors. Here are some of them:
Recruitment Method
The recruitment method used plays a big role in determining the cost per hire. Traditional methods such as job boards, print advertising, and staffing agencies tend to be more expensive than newer methods like social media and digital recruiting.
Job Location
Depending on the location of a job opening, the cost per hire can vary significantly. For example, hiring for a job in a major metropolitan area may be more expensive than hiring for the same job in a rural or suburban location.
Quality of Candidates
The quality of candidates you receive plays an important role in cost per hire. If your recruiting process is not efficient enough to attract and hire the right candidates, your cost per hire will be higher.
Time to Fill
The amount of time it takes to fill a role directly impacts the cost per hire. If you’re able to fill roles quickly, you can minimize recruitment costs. On the other hand, if it takes a long time to find and vet suitable candidates, your costs will increase.
Employee Benefits
The cost of employee benefits must be factored into the cost per hire equation as well. If you offer generous benefits packages, this can add to the total expense of hiring a new employee.
What are the effects of Cost Per Hire on a startup?
Here are some of the common effects of Cost Per Hire on a startup:
Limited resources
Cost Per Hire can be a major factor in restricting a startup’s ability to recruit the best talent due to their limited financial resources. Higher cost per hire may also lead startups to focus on short-term hiring instead of selecting candidates that are better suited for long-term growth.
Increased competition
With the cost of hiring continuing to rise, startups may have a harder time competing with larger corporations when it comes to attracting top talent. Not only do large companies typically have more resources to allocate towards recruiting initiatives, but they also tend to have better-established reputations which can make them more attractive to potential candidates.
Higher Training Costs
Due to the increased competition when it comes to recruiting, startups may have a harder time finding qualified candidates that are already trained and knowledgeable in their area of expertise. This means startups will likely have to dedicate more resources towards training new hires which can result in higher cost per hire.
Slower Growth
Cost Per Hire can be a major factor in determining the speed of a startup’s growth. If costs are too high, startups may have to make hard decisions over which areas they can invest in and prioritize. This could mean sacrificing potential opportunities for growth and expansion due to their limited resources.
Decreased morale
When dealing with tight budgets, startups may have to make hard decisions over which areas they can invest in. This could mean sacrificing potential opportunities for growth and expansion due to their limited resources, which can lead to decreased morale among the team. High cost per hire also means there is a greater burden on the remaining staff to ensure that new hires are performing well and living up to expectations.
Overall, Cost Per Hire can be an important factor for startups to consider when it comes to recruiting and staffing their organization. Not only does it affect the bottom line, but it can also have a major impact on their ability to compete in the market and attract top talent. Taking the time to understand and manage cost per hire can be one of the best investments a startup can make and can lead to increased growth and success in the long run.
What is a good Cost Per Hire?
Hiring is one of the most important functions of any business, but it can also be one of the most expensive. The cost per hire is the amount of money a company spends to fill an open position. It can vary widely depending on the business’s size, location, industry, and open positions. A good benchmark for the cost per hire is anywhere between $2,000 to $5,000.
This figure can be lower or higher depending on your business’s size, location, industry, and open positions. To calculate your company’s cost per hire, simply divide the total amount spent on recruiting and hiring by the number of new hires made. This will give you a good baseline to work from when trying to improve your company’s hiring efficiency. By understanding your cost per hire, you can make changes to your recruiting and hiring process that will save your business time and money.
Cost Per Hire By Industry
The Society of Human Resource Management (SHRM) has determined that the average cost per hire stands at slightly over $4000. However, it is important to note that these figures can drastically vary depending on the size and scope of your company as well as the sector it operates in.
High-level positions and those in niche industries often have longer times to hire and require a more extensive sourcing process, resulting in an increased cost per hire. So, while the average cost is useful to consider, it should not be taken as a definitive answer. Your own costs may significantly differ depending on the role you are trying to fill.
Cost per hire benchmarks
To determine whether your cost per hire is high, low, or average, you can compare it to available benchmarks. It’s important to note that certain positions may take longer to fill and require more sourcing, which will drive up your overall cost per hire.
Industry benchmarks
- $4129: according to SHRM
- $4000: according to Bersin
- $3400: cost for an entry-level employee
- 16% of annual salary: cost for a 30K or less job
- 20% of annual salary: cost for a 75K or more job
Recruiting channel source of hire benchmarks
- $1248: Major job board
- $803: Niche job site
- $513: Job aggregator
- $616: Social network
- $285: Glassdoor
Tips To Improve Cost Per Hire
Hiring can be a very costly process, with the average cost-per-hire sitting at around $4,129. This number can obviously vary depending on the company’s size and location and the positions being filled. There are, however, a few tips and tricks companies can use to help lower their cost-per-hire.
First and foremost, it’s important to have a clear understanding of what the position entails. Too often, job descriptions are either too vague or too specific, resulting in candidates who are not properly qualified for the role. By creating a detailed and accurate job description, companies can avoid spending time and money on interviewing candidates who are not a good fit.
Another way to improve cost-per-hire is to make use of technology. Now, numerous online tools are available that can help with everything from creating job postings to screening candidates. Utilizing these tools can save a significant amount of time and money.
Finally, it’s important to remember that employees are not just numbers on a page. The best way to lower cost-per-hire is to create an attractive employer brand that will make potential candidates want to work for your company. By offering competitive salaries and benefits and creating a positive work environment, you’ll be able to attract top talent without breaking the bank.
Conclusion
The cost-per-hire is one of the most important metrics for any business that relies on recruiting to supplement its workforce. By understanding all of the factors that go into this calculations, you can more effectively manage your recruitment budget and goals. Do you have a process in place to calculate your cost-per-hire? What other methods do you use to keep track of your hiring costs?