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How To Calculate Cost Per Hire
Updated on November 20, 2023
How To Calculate Cost Per Hire
Cost per Hire (CPH) is a critical metric for businesses that measures the total expenses incurred during the entire recruitment and hiring process of new employees.
For small business owners, every penny matters. Calculating CPH enables business owners to gain a clear understanding of the actual financial impact of each new hire.
Knowing the real cost of bringing in talent empowers you to make informed decisions about recruitment strategies and budget allocation. Additionally, it helps optimize your hiring process, ensuring you attract and retain top-notch employees without breaking the bank.
CPH serves as a powerful tool guiding your business towards more cost-effective and efficient hiring practices, setting it up for long-term success.
Key Components of Cost Per Hire
Previously, companies calculated their cost per hire using their own method, making it difficult to compare results. In 2012, the Society of Human Resource Management and the American National Standards Institute collaborated to create a standardized formula.
The calculations required to figure out CPH are very simple. All you have to do is add up internal recruiting costs and external recruiting costs in a given period and then divide that number by the total number of hires.
Unfortunately, things can get a bit complicated when it comes to identifying the internal and external costs that are a part of recruiting and hiring. The standard formula includes a long list of possible costs to include in this calculation. Though it is not mandatory for businesses to include them, it is accurate to account for any of these expenses in your CPH formula.
The first element of the CPH formula is the sum of the external costs associated with hiring a new employee. These include all expenses paid out by the organization to other sources, such as
- Advertising and Marketing Expenses
- Applicant Tracking System (ATS) Costs
- Interview and Assessment Expenses
- Background Checks and Pre-employment Testing Costs (eligibility to work, drug testing)
- Campus Recruiting Expenses
- Consulting Services
- Contingency Fees
- Employee Referral Awards
- Immigration Expenses
- Recruitment Process Outsourcing Fees
- Sign-On Bonuses
- Sourcing Costs
- Travel and Expenses for Candidates and Recruiters
- Technology Costs
- Third-Party Agency Fees
Internal hiring costs are the expenses paid within the organization, such as recruiters’ salaries or membership fees for recruiting platforms. Examples of internal hiring costs include
- Cost of Recruiting Staff
- Cost of Sourcing Staff
- Internal Overhead for Government Compliance
- Non-labor Office Costs
- Recruiting Learning and Development
- Secondary Management Cost of Time for Events
- Secondary Management Cost of Time for Recruiting
How to Calculate Cost Per Hire
1. Identify Relevant Expenses
First, make a list of all relevant internal and external hiring expenses. Take your time with this step, as there are often hidden costs to hiring that don’t come to mind immediately but will still significantly affect your CPH.
2. Gather Data for Each Expense Category
Once you know what expenses you’re looking for, it’s time to gather data. Figure out how much you actually spent in each category in a particular period, such as a business quarter or one year. A bookkeeper can be very helpful at this stage.
3. Calculate Total Recruitment Expenses
After calculating the sum of how much your organization spent on internal and external hiring costs, add those two totals together for the total amount spent on hiring.
4. Determine the Number of Hires within a Specific Time Period
The last information you need is the total number of hires your organization made within the period.
5. Calculate the Average Cost per Hire
Now, divide the total amount spent on hiring by the total number of hires within the same period. That’s your cost per hire!
6. Out-Of-Scope Costs
It’s important to note a few expenses that should not be included in these calculations.
Out-of-scope cost data refers to expenses that occur after an employee is hired, such as their salaries and benefits. Your calculation should not include these costs as they are not part of the hiring stage.
Understanding the Implications of Cost per Hire
Though it can be confusing to calculate, your CPH is invaluable in measuring your business’s economic health.
Standardizing this metric allows you to benchmark your organization’s performance against industry standards to help you identify how your organization ranks compared to others in the field.
It also provides helpful feedback on your recruiting strategies. If your cost per hire is high, that indicates that you’re not using the most effective methods to equip your organization with talent. You may need to spend some time determining how to create a successful hiring process.
Finally, knowing their CPH allows businesses to understand hiring’s impact on the overall budget, which helps them make more informed decisions about future financial planning.
Common Challenges and Considerations
Though the calculation to determine CPH is fairly straightforward, there are a few things to watch out for. If you don’t take the time to carefully consider all costs involved with hiring, you could calculate your CPH incorrectly and make financial decisions based on faulty information.
The direct costs of hiring are usually easier to see — such as a recruiter’s salary — but if you’re not careful, indirect costs can slip by undetected. An example of an indirect cost is an employee referral reward program.
Offering a reward to employees for referring excellent candidates to open positions can be very effective. Still, don’t forget to consider the reward as part of your overall hiring costs.
Strategies to Optimize Cost Per Hire
Once you’ve calculated CPH, you may notice that it’s higher than you’d like. You can employ several strategies to lower your cost per hire while maintaining (or improving) your hiring results.
Utilizing Cost-Effective Recruitment Channels
When seeking to optimize your CPH, it’s important to be willing to change the things that aren’t working. If you have consistently sent recruiters to a career fair without seeing results, you may want to rethink that expense.
This is also true for the social media or job boards you use to attract candidates. Some job boards charge a hefty subscription fee, and if they aren’t yielding some high-quality applications, you could probably put your money to better use elsewhere.
Improving the Efficiency of Hiring Processes
Even if the recruiting strategies you use are working, if your team takes longer than necessary to move candidates through the hiring process, they could be inadvertently driving up the CPH.
Take steps to improve the efficiency of the process, both to ensure a better candidate experience and to use your organization’s hiring budget more effectively.
Leveraging Technology and Applicant Tracking Systems
Applicant tracking systems are excellent tools for expediting the hiring process, as they allow you to track candidates as they move from initial screening to a final interview.
Especially if you use multiple recruiting platforms or social media accounts, an ATS can help ensure you’re getting your money’s worth from your subscriptions by helping recruiters stay organized.
Investing in Employer Branding
Employer branding is sometimes overlooked but can be invaluable in recruiting efforts. Investing in your employer branding means committing to optimizing the employee experience.
This can look like working to improve company culture, ensuring candidates undergo a smooth and efficient hiring process, and investing in employee development. The candidate attraction stage becomes significantly easier if your positive reputation precedes you.
The bottom line is that when people know that your business has a reputation for treating its employees well, they will be much more inclined to join your organization, which can save money on recruiting costs and lower your CPH.
Calculating cost per hire is simple, but identifying all the contributing expenses can take some effort.
Still, knowing how much your organization is spending on each hire can be extremely helpful in your efforts to optimize your hiring process and use your budget to its full potential.
Understanding the true expenses associated with talent acquisition gives you the ability to make well-informed choices regarding recruitment approaches and financial distribution. Furthermore, it aids in streamlining the hiring process, enabling you to attract and retain highly skilled employees without exceeding your budgetary limits.
By leveraging CPH, your business can steer towards more economical and effective hiring strategies, positioning itself for sustained success.
Cost per hire (CPH) is a metric used to measure the total expenses incurred by an organization during the recruitment and hiring process for a new employee. It helps businesses understand the financial impact of bringing new talent into the company.
Calculating CPH is essential for businesses to make informed decisions about their recruitment strategies and budget allocation. It provides insights into the efficiency and effectiveness of the hiring process and helps optimize recruitment efforts.
CPH includes various direct and indirect costs, such as advertising expenses, applicant tracking system fees, interview and assessment costs, background checks, pre-employment testing, onboarding, and training expenses.
To calculate CPH, add all the recruitment expenses and divide the total by the number of hires within a specific period. The formula is: CPH = (Total Recruitment Expenses) / (Number of Hires).
Yes, you can include other costs that have an impact on the hiring process, such as relocation expenses, referral bonuses, and agency fees. Including these costs will provide a more comprehensive view of the true cost associated with hiring new employees.
Understanding CPH allows businesses to benchmark their recruitment costs against industry standards, evaluate the effectiveness of their hiring strategies, and make data-driven decisions to optimize their recruitment processes.
Businesses can optimize CPH by using cost-effective recruitment channels, streamlining hiring processes, leveraging technology and applicant tracking systems, and investing in employer branding to attract top talent more efficiently.
Some challenges include identifying and accounting for hidden costs, differentiating between direct and indirect expenses, and accurately tracking internal referrals’ impact on CPH.
Absolutely! Small businesses can benefit significantly from calculating CPH as it enables them to allocate their limited resources more effectively and make cost-efficient hiring decisions.
It’s advisable to calculate CPH regularly, such as on a quarterly or annual basis, to monitor recruitment costs and assess the effectiveness of changes implemented in the hiring process. Regular monitoring allows for timely adjustments and improvements.