Cost Per Hire

Cost per hire is one of the most important key performance indicators (KPIs) for recruiting teams to understand. This metric provides invaluable insights into the efficiency and effectiveness of your recruiting process. In this comprehensive guide, we’ll cover everything you need to know about calculating, interpreting, and applying cost per hire within your organization.

What is Cost Per Hire and Why Does it Matter?

Cost per hire is defined as the total costs incurred to make a hire, divided by the number of hires made in a given period. Simply put, it calculates the average expenditure to hire each new employee.

This recruiting KPI is crucial for several reasons:

• It measures the efficiency of your hiring process – A lower cost per hire indicates a more optimized and streamlined recruiting operation. This saves your organization time and money.
• It benchmarks performance over time – Comparing cost per hire month-over-month or year-over-year shows improving or worsening trends.
• It justifies recruiting budgets – The data can demonstrate how investing in certain recruiting activities affects cost per hire.
• It facilitates goal setting – Understanding your baseline cost per hire allows you to set realistic goals to reduce it.
• It spotlights high-cost areas – Breaking down the metric helps identify the most expensive recruiting activities to optimize.

For any HR or recruiting department, regularly tracking cost per hire is essential. Doing so provides the visibility needed to make strategic investments, control budgets, and boost efficiency.

Calculating Cost Per Hire and Where to Source Data

While the cost per hire formula itself is simple, accurately calculating the metric can be difficult. Here’s a step-by-step guide to the key components:

Key Components and Costs to Include

When tallying your total recruiting costs, consider all expenses related to attracting, assessing, and onboarding candidates.

• Salaries of recruiting team:
  The portion of HR staff salaries tied to recruiting efforts. Include benefits and taxes.
• Job advertising:
  Any costs of posting jobs online, promoting openings through social media, job fairs, etc.
• Recruiting tools and software:
  Budget allocated to ATS systems, background check tools, skills testing platforms, etc.
• Agency/headhunter fees:
  Any amounts paid to third party recruiting firms or headhunters.
• Travel:
  Expenses related to recruitment travel like on-site interviews and events.
• Training:
  Orientation or onboarding training costs for new hires.
• Administrative:
  Other costs like supplies, telephone, internet, etc.

Data Sources

Track these recruiting expenses by sourcing data from:

• Recruiting team budgets and expense reports
• HR information systems
• Applicant tracking systems
• Invoices from vendors and agencies
• Reimbursement forms for travel expenditures

Getting an accurate analysis requires collecting comprehensive cost data from all these sources.

Example Cost Per Hire Calculation

Let’s look at an example to illustrate how to calculate cost per hire:

Acme Company made 210 hires last year. Their total recruiting costs were:

• Recruiters salaries and benefits: $220,000
• Job board postings: $31,000
• ATS software: $9,500
• Agency fees: $42,000
• Travel for interviews: $7,200
• Onboarding training: $4,800
• Administrative expenses: $3,200

Total = $317,700

Acme Company’s cost per hire = $317,700 (Total Costs) / 210 (Number of Hires) = $1,513

This means each new hire cost Acme Company $1,513 on average last year.

Let’s say their cost per hire the previous year was $1,837. This shows they’ve improved efficiency, reducing average costs by $324 per hire.

Cost-per-hire metrics, demystified

Calculating cost per hire involves summing all internal and external recruitment expenses and dividing by the total number of hires in a given period.

Interpreting Your Cost Per Hire Results

Once you’ve computed your cost per hire, how do you evaluate the number? What makes for a “good” or “bad” result? Here are some tips:

Industry Benchmarks

One way to gauge your cost per hire is by comparing it to your industry average. While benchmarks vary significantly across sectors, here are a few examples:

• Technology: $4,425
• Manufacturing and industrial: $4,152
• Consumer goods: $3,243
• Financial services: $3,007
• Healthcare: $2,546
• Retail: $2,194

Of course, take these benchmarks with a grain of salt. Focus more on your own trends over time rather than arbitrary external comparisons.

Historical Trends

Evaluate your current cost per hire against previous periods for your organization. Lower is typically better, as it indicates increased productivity. However, consider your unique circumstances each period.

For example, if you intentionally invested more in recruitment marketing to grow your employer brand, an increase could be reasonable. The higher expenditure may pay off in quality hires down the road.

Goals

Setting cost per hire goals also helps contextualize your results. Leadership might aim for a 10-15% reduction annually as a realistic but ambitious target. Measure your actual cost per hire against goals to identify gaps.

Recruiting Process Analysis

Beyond the absolute cost per hire number, use the data for deeper analysis:

• Which activities make up the biggest share of costs? Focus process improvement in those areas first.
• Do costs escalate at certain stages like interviewing or background checks? Look for blockages in the process.
• How do costs vary across departments, locations, seniority levels? Identify particular segments to optimize.

Let the cost per hire results guide your recruiting diagnostics. The insights uncovered will point you to impactful process enhancements.

How to Improve Your Cost Per Hire

Once you’ve calculated and interpreted your cost per hire metric, putting strategies in place to reduce it is key. Here are some best practices:

Invest in Recruiting Technology

Automating manual tasks with tech-enabled recruiting solutions reduces costs significantly.

• Implement intelligent tracking systems to streamline sourcing and screening applicants. Features like auto-scheduling, SMS messaging, and more can trim recruiter time per hire.
• Use pre-employment testing platforms to evaluate candidates faster. Skills, cognitive ability, and personality assessments auto-scored by algorithms scale far more than manual interviews alone.
• Build a referral management portal to capture referrals from employees. Tracking referral bonuses and launching automated referral campaigns cuts advertising costs.
• Survey new hires to benchmark their onboarding experience. Gathering fast feedback spots issues to enhance training and retention.

These are just a few ways smart technology cuts average cost per hire.

Apply Targeted Sourcing Strategies

How and where you source applicants influences cost per hire in a big way. Here are two options to reduce spending:

• Focus on high ROI channels:
  Track and compare the costs of different sources relative to hires produced. Double down on the highest ROI talent pipelines. Referrals and your own CRM often surpass job boards.
• Develop pipeline in advance:
  Building an ongoing talent pool before openings occur prevents rushed, expensive searches. Maintain a robust database through community outreach and inbound marketing.

Getting strategic with sourcing and maintaining a large, qualified talent pipeline keeps cost per hire low.

Refine Your Candidate Screening Process

The more effectively you screen applicants, the lower your cost per hire will be. Two key principles:

• Screen early and often:
  Use basic skills tests immediately after application submission rather than late in the process. Identify unqualified candidates faster to minimize wasted time.
• Create screening standards:
  Determine consistent criteria applicants must meet to advance at each stage. Sticking to standards, like required skills test scores, reduces discretionary interviews that inflate costs.

Instituting a lean, consistent screening process ensures you spend recruiting dollars where they count most – on qualified applicants.

Case Study Example

Say a company had a cost per hire of $3,000, which was higher than leadership wanted. By analyzing their data, they saw the majority of costs came from job board advertising and interviewing.

They took the following actions:

• Invested in an ATS to automate screening and administrative tasks.
• Launched a referral program with a $500 bonus for successful candidates.
• Instituted skills tests earlier in the process and set minimum score requirements.
• Trained recruiters on standardized screening best practices.

In the first quarter after implementing these strategies, their cost per hire decreased by $825 (28%). The actions taken directly targeted previously high-cost areas.

This example demonstrates that by tracking detailed cost data and taking strategic action, reducing cost per hire is very achievable.

Real-World Applications and Use Cases

Now that we’ve covered how to calculate and interpret cost per hire, as well as strategies to improve it, let’s explore some of the ways this metric can be applied in real-world recruiting situations:

Budget Planning

One of the most common and impactful uses of cost per hire is for recruiting budget planning. Leadership can establish a target cost per hire for the upcoming fiscal year based on goals, historical data, and benchmarks.

Knowing this target cost per hire, recruiters can reverse calculate the budget needed to achieve desired hiring numbers. For example:

• Company plans to hire 1,000 employees next year
• Their target cost per hire is $2,000
• So their estimated recruiting budget should be:
  1,000 hires x $2,000 cost per hire = $2,000,000

Without a clear handle on cost per hire, recruiting teams often underestimate true budget needs. Tracking this meticulously allows accurate planning.

Cost-Benefit Analysis

Cost per hire also powers helpful cost-benefit analyses for major process changes or tech investments.

For instance, leadership might consider investing $100K in a new applicant tracking system. They can project how the increased automation could reduce average cost per hire, and thereby calculate ROI.

• Current annual cost per hire = $1,500
• ATS promises to reduce this by 15%
• Expected new cost per hire = $1,275
• Annual hires = 1,000
• Total expected savings = 1,000 * ($1,500 – $1,275) = $225,000
• $225K savings minus $100K ATS costs = $125K net benefit

Determining the baseline cost per hire enables this analysis to build a tangible business case.

Hiring Manager Feedback

Another great application is providing cost per hire data directly to hiring managers. Often, they won’t realize how expensive and time-intensive recruiting can be.

Giving each manager their team’s specific cost per hire for last year’s hires helps set expectations. It also highlights the value of stakeholder participation in hiring success.

Additionally, their unique cost per hire breakdowns can indicate problem areas to address, like excessive interview rounds or overly selective criteria. Engaging hiring managers creates shared ownership of costs.

Recruiter Performance

Cost per hire can also be used to evaluate individual recruiter performance and award top achievers.

For example, recruiters could be segmented by department/team they support. The recruiter with the lowest annual cost per hire in their segment earns a bonus or recognition for their efficiency.

Publicizing these wins motivates the team and creates healthy competition. It also reinforces the behaviors you want to see – diligent tracking of costs and creative cost reduction.

Candidate Assessment

An additional application is factoring cost per hire into candidate assessments during the hiring process.

Two applicants may be equally qualified on paper, but one may be more “expensive” based on expenses accrued to that point.

For instance:

• Candidate A cost $1,000 to source, screen, and interview
• Candidate B cost $2,500 due to extra screening rounds
• All else equal, Candidate A has a lower cost per hire
• While not the only consideration, this could be a tiebreaking factor

The same methodology can apply when weighing internal vs. external hires. Including each candidate’s cost per hire in your evaluations leads to overall lower recruiting costs.

Real-World Examples and Case Studies

To provide tangible examples of these use cases in action, let’s look at a few companies utilizing cost per hire successfully:

Reducing Agency Dependency

CloudCentral, a major provider of cloud-based communications solutions, saw their cost per hire rise from $3,497 to $4,081 over two years. Analyzing the data revealed that increased hiring volumes led them to over-rely on expensive external agency support.

By tracking cost per hire rigorously, they caught this trend. CloudCentral then trained internal recruiters and transitioned responsibilities away from agencies. After optimizing their in-house capability, CloudCentral reduced cost per hire by 32% the following year.

Tightening Screening Criteria

At ProjectExcellence, a project management software company, cost per hire rose from $6,200 to $8,100 over a 6 month period. They traced the increase primarily to engineering roles that had up to 12 interviews each.

Using cost per hire data, ProjectExcellence realized they over-interviewed candidates. They instituted stricter screening criteria to limit interviews to 4-6 per candidate. This selective approach reduced cost per hire by $1,600 while maintaining hire quality.

Spotlighting High-Cost Roles

Mississippi Tool, a leading manufacturer of power tools, saw a $500 increase in cost per hire to $6,300. Segmenting cost per hire by role showed that R&D hires cost 265% more than the average.

These insights allowed them to customize sourcing strategies for R&D roles. They focused on low-cost channels like employee referrals vs high-cost job boards. Within one year R&D cost per hire decreased by $2,100.

Linking to Business Goals

Beyond these practical applications, cost per hire also directly supports key business objectives that impact the bottom line, including:

• Reduced Spending:
  As described, lowering cost per hire inherently reduces HR costs through greater efficiency. These savings result in improved profitability.
• Quality of Hire:
• While costs should be controlled, it must not come at the expense of hire quality. Candidates hired faster and more efficiently have higher retention rates.
• Headcount Growth:
• For rapidly expanding companies, reasonable cost per hire enables aggressive hiring goals to be achieved sustainably.
• Employer Brand:
• Excessive cost per hire can be a symptom of a poor candidate experience. Ensuring an optimized process protects your employer brand.
• Profitability – Ultimately, spending smartly on recruiting through cost per hire analysis maximizes profit per employee. The right hires at the right cost directly enhance profits.

When viewed from this broad business perspective, cost per hire is clearly a fundamental KPI that aligns to company goals. While HR-owned, its implications are felt organization-wide.

Key HR Metrics: Analyzing Your Cost Per Hire

The cost per hire is a widely used metric that allows organizations to see how much their company is spending to fill an open position.

Historical Trends and Predictive Insights

When analyzing cost per hire over an extended period, some key trends and patterns typically emerge:

Macroeconomic Trends

Cost per hire often correlates strongly with macroeconomic trends. When unemployment is low and the labor market is tight, costs tend to rise. Conversely, in recessions with high unemployment, cost per hire drops as more candidates vie for jobs.

For example, United States cost per hire soared to over $4,000 on average during the hot job market of the late 1990s tech boom. However, after the dotcom crash, it declined nearly 40% to under $2,500.

While broader economic cycles like this are hard to control, understanding their impact allows more accurate forecasting. Assume higher costs per hire when talent is scarce, and lower costs when talent abounds.

Seasonal Variations

In addition to macro trends, cost per hire often fluctuates predictably within years and quarters.

Many industries experience seasonal hiring surges that strain recruiting. Retail and logistics cost per hire frequently spikes 20-30% in Q4 for holiday season demand. Education sees elevated costs in Q3 to staff up for the school year.

Planning for these seasonal jumps allows budgeting with no surprises. Look back at multi-year trends to forecast seasonal needs, and consider smoothing costs by hiring some seasonal staff earlier.

Impact of Major Initiatives

Finally, major business initiatives like new product launches, office expansions, mergers & acquisitions also influence cost per hire trends.

When these projects that necessitate large hiring volumes occur, costs tend to rise in the months preceding launch due to compressed timelines. Understanding your strategic roadmap allows accounting for the recruiting impact of growth initiatives.

While historical data reveals these useful patterns, analytics can also help predict future trends.

Predictive Analytics

Sophisticated modeling using past cost per hire data allows reasonably accurate forecasts of future costs. Factors like business growth plans, labor market projections, seasonal adjustments, and more all feed such models.

Leading organizations are tapping recruiting analytics to predict:

• Future cost per hire:
  Projecting total recruiting costs and headcount plans generates expected cost per hire.
• Cost per hire by role:
  Statistical analysis identifies roles most likely to have volatile vs. stable costs quarter to quarter.
• Hiring volume impact:
  Correlating past hiring volume spikes with cost per hire increases predicts budget needs.
• Market indicators:
  External labor supply/demand data combined with internal trends improves forecasts.

Analytics transform cost per hire from rear-view mirror metric to powerful planning tool. Of course, predictive modeling is not infallible. But it does enable data-driven budgeting vs. guessing.

Benefits and Limitations of Tracking Cost Per Hire

Given the wealth of insights it provides, calculating and analyzing cost per hire clearly offers significant benefits. However, the metric is not without some limitations. Being aware of these allows more contextual application:

Key Benefits

• Efficiency benchmark:
  As discussed, lower cost per hire indicates more productive recruiting. This enables goal setting and monitoring progress.
• Budgeting forecaster:
  Helps accurately project future budget needs based on historical costs and hiring plans.
• Process optimization guide:
  Shows where to focus (stages with highest costs) to achieve the greatest savings.
• Tech investment evaluator:
  Provides the ROI data needed to build a case for recruiting tools like ATS that reduce manual costs.

Limitations & Misconceptions

• Varies significantly by industry/role:
  Cost per hire benchmarks should focus on internal trends rather than arbitrary external comparisons.
• Can increase along with quality:
  Don’t assume higher cost always equals worse recruiting. It can mean appropriately higher investment to land top talent.
• Susceptible to external factors:
  Macroeconomics, regulations, and other forces outside your control also influence costs.
• Not universally calculated the same:
  Firms may include or exclude different components in total costs inconsistently.

Being cognizant of these nuances ensures you apply cost per hire analysis intelligently for your specific organization.

Final Recommendations and Next Steps

For companies not currently tracking cost per hire formally, implementing the following foundational measures can get you started:

• Document detailed recruiting costs:
  Begin itemizing all recruiting expenditures per the categories outlined earlier, even if manually at first. Missing data will skew analysis.
• Analyze spend over time:
  Review the last 1-2 years of total costs, hires, and resulting cost per hire. Look for trends and outliers you can now explain based on events.
• Set a cost per hire baseline:
  Using the above data, establish a current baseline cost per hire for goal setting and benchmarking.
• Assign ownership:
  Put someone formally in charge of compiling cost per hire data on an ongoing basis for regular reporting.

For companies with mature cost per hire tracking, the following steps can optimize its use:

• Report cost per hire regularly:
  Share results company-wide to drive engagement. Include segmentations by key dimensions like department, role, channel, etc.
• Develop forecasts:
  Create models to predict future cost per hire based on historical data, hiring plans, and market projections.
• Highlight improvement opportunities:
  Based on data, spotlight areas with the greatest potential for cost optimization and process improvement.
• Recognize successes:
  Celebrate teams and individuals who meaningfully reduce cost per hire through creative initiatives.

FAQs

1. How is cost per hire calculated?
   Cost per hire is calculated by totaling all costs involved with recruiting and hiring a new employee, then dividing that total by the number of hires in that period.
2. What costs should be included in cost per hire?
   Typical costs include recruiter salaries, job advertising, background checks, agency fees, travel for interviews, training, and any technology costs like an ATS. Basically any expenditure related to attracting, assessing, selecting and onboarding candidates.
3. What’s a good cost per hire?
   There is no universal “good” cost per hire as it varies widely by industry and location. Focus on your own historical trends and goals. Lower is typically better, but invest appropriately to land top talent.
4. Should I compare our cost per hire to benchmarks?
   External benchmarks can provide high-level context, but your organization’s unique needs and circumstances make comparisons of limited value. Keep the focus on improving your own trends over time.
5. Why does cost per hire matter?
   A lower cost per hire indicates an efficient, streamlined recruiting process that saves money. Tracking it also provides data to set budgets and identify high-cost areas to optimize.
6. How can I reduce our cost per hire?
   Strategies like automating tasks, enhancing sourcing, screening candidates effectively, improving pipeline management, and more can lower cost per hire.
7. Does a higher cost per hire mean my recruiting is ineffective?
   Not necessarily – it could mean appropriately higher investment to attract the best candidates, which brings a positive ROI long-term. The context matters.
8. How often should I calculate cost per hire?
   Experts recommend tracking it regularly, such as monthly or quarterly. Annual calculations help, but may not surface trends quickly enough to take timely action.
9. What other metrics are linked to cost per hire?
   Time to fill, source of hire, quality of hire and recruiting ROI can provide additional insights to use alongside cost per hire.
10. Can I forecast my future cost per hire?
    Yes, through data modeling you can forecast expected future cost per hire based on historical costs, hiring plans, labor market trends and other predictive factors.