How to calculate and minimise the Cost per Hire
Hiring new employees can require big investment from a company. For that reason, hiring managers have to control and optimise the cost per hire, aside from having to find, recruit and retain the best talent. In fact, it is expected from HR departments to keep the cost per hire as low as possible.
But for your team to be totally aligned with your company’s financial strategy and control the hiring costs, it is mandatory to know exactly how much the cost per hire is and how to calculate it. This will also allow you to assess how cost effective and how cost efficient your recruitment process is, as well as helping you to identify key improvement areas and optimise your recruiting budget.
What is the Cost per Hire?
The cost per hire is the average amount of money you spend to make a new hire. It includes all costs related to recruitment, purchase of equipment, onboarding, administrative costs and benefits. And it can vary depending on variables like the company’s size, the seniority of the position, the number of recruitment channels used and the strength and efficiency of in-house capabilities. This is definitely the most important metric for talent analytics given that it allows you to better manage your recruiting budget and helps you make better strategic decisions in the long term that may save your company money and attract better candidates.
How is the Cost per Hire calculated?
The cost per hire formula consists on the sum of all internal and external recruiting costs divided by the number of hires:
Total Internal Recruiting Costs + External Recruiting Costs / Total of hires
In order for your calculations to be as accurate and insightful as possible you must use correct and precise data. To help you with that, here’s a list of what you should consider as internal and external recruiting costs.
1. Internal Recruiting Costs
These include all costs related to the recruitment department, such as:
- Recruiter salaries
- Fixed costs related to infrastructures
- Employee referral program
2. External Recruiting Costs
These include all expenses related to external vendors and candidates, namely:
- Agency fees
- Job fairs
- Travel costs
- Relocation costs
- Signing bonuses
How can the Cost per Hire be optimised?
Once you do your math, you may wonder where does your cost per hire stand in comparison with other companies. A great way of assessing if your cost per hire is high, low, or average is to benchmark your company against the overall average and your industry peers.
Aside from assessing what your department status in terms of cost per hire is, you can continuously improve your recruitment processes and cut back on activities that don’t deliver a proper return on investment.
Here are three simple things you can do to optimise your cost per hire:
1. Use your Cost of Hire Data
When it comes to improving your recruiting department’s performance, the cost of hire data is a great tool to adjust your strategy and plan future investment. This requires you to examine the cost per hire regularly so that you can identify areas for improvement and keep track of the impact any measure you have taken such as a workflow alteration or a technology update, for instance.
You can also analyse the cost per hire by department and position filled to identify if there is any way you can lower the costs of the recruiting activity. Another set of data that can be relevant is the cost by source of hire. You can identify the source which is the most cost-effective either manually or in your ATS. Regardless of the business pressure to reduce costs, it’s extremely important to take in consideration the quality of hire and how it correlates with the cost per hire, among other metrics.
A bad hire can cost a company on average two to three times the employee’s salary. That said, you must also analyse what the quality of hire is when the cost per hire decreases. If it also decreases you need to re-evaluate your recruitment process and find a middle ground to keep the cost per hire as low as possible while achieving the desirable level of hire quality.
2. Use an applicant tracking system
An ATS allows you to streamline and standardise your recruitment process and workflows. This kind of tool, like the one offers, can save you both time and money when it comes to screen, interview and hire new employees.
3. Use Social Media
Social media is a great way to attract new candidates, keeping your talent pool filled, and it provides you with additional insight into what those candidates may be like to work with. On the other hand, it’s also an effective tool to boost your company’s employment brand and provide a better candidate experience.
Thanks for reading and see you next time!
Your team here at skeeled