Cost Per Hire: How To Calculate & 4 Best Practices

Cost per hire refers to how much it will cost you each time you recruit a new member to your team. It’s an essential metric for businesses to measure to ensure they don’t overextend themselves during the hiring process.

Inefficient hiring practices can lead to premature dismissal of staff, which isn’t good for anybody. The cost of turnover can amount to 33% of an employee’s salary.

Knowing the cost per hire ensures that you can optimize every aspect of the hiring process. It also helps to ensure that hiring managers and recruiters understand the financial stakes involved every time they start the hiring process.

Different businesses have different ways of working out their CPH, but there is a standardized formula you can follow to get you started:

(Internal recruitment cost + External recruitment cost) / total number of hires = CPH

For example, say you spent $100,000 on the recruitment process and hired 30 candidates. Your CPH would be $3333.

Whether this reflects your overall spending is entirely individual to your business. The only way to know if your recruitment process is economical is by breaking it down into key steps.

Half of your equation is your internal recruiting costs, but what are they? We’ve broken down some of the most common below:

• Hiring staff: You need to consider the cost of assigning a hiring manager to complete this process. Under ordinary circumstances, they would be working to drive profits, but now they are sifting through job applications. That is money your company spends on labor.
• Administrative/Equipment Fees: You need to make sure before your new staff member arrives that they have all the equipment they need. Depending on the industry, this could include office equipment or more specialized tools. Preparation for what comes after hiring is still part of the recruitment process.
• Training: How in-depth your training process needs to be will vary enormously between industries, but all jobs require training. Whether they need weeks of training or just a single day, training costs money, especially if they need to complete an external course.

The other half of your recruitment costs will come from external sources. These primarily relate to aspects of the hiring process that require third-party intervention. Here are some common examples:

• Background Checks: The importance of background checks is hard to overstate, but they certainly incur a charge. Depending on how thorough the background check is, this could make up a large part of your external spending.
• Preliminary Screening: Some jobs require that the candidate pass a series of tests before they can be accepted for a role, usually relating to numeracy or literacy. The administration of this will cost you.
• Staff Sourcing: Before you can hire anyone, you need to find the ideal candidate. Posting your job advertisement costs money, especially if you post it across several websites, so make sure to factor this into your recruitment budget.

External costs tend to make up the bulk of your budget as they involve third parties. You have some control over your internal costs and can cut back where necessary. You do not have the same control over external costs.

The last part of the equation is how many people you hire. Depending on the current size of your team and how many people you need to expand or maintain your business, this number can vary enormously. It could be anywhere from five to 50.

Before recruiting, settle on a specific number of new staff members you want to hire. It will allow you to keep tabs on your spending throughout the process.

Here are our four top tips on how to reduce the cost of hire:

Create a cost report

Keep an ongoing file on how much you spend throughout the entire recruitment phase. Tracking costs is easy to manage using a spreadsheet.

Record all internal costs

Every time your hiring team spends anything internally, record it in the cost report, no matter how small.

Record all external costs

Just as above, record everything third-party services charge for you.

Determine your number of hires

Finally, keep a clear and specific number in mind of how many people you intend to hire. If this number changes for whatever reason, make sure everyone involved in the hiring process understands ASAP.