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What Is the Cost Per Hire?

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Posted by: David Garcia July 01, 2024

The cost per hire refers to the total expenses incurred by a company to recruit and onboard a new employee. This metric includes all direct and indirect costs associated with the hiring process, such as advertising, recruiter fees, background checks, and training. 

Calculating the cost per hire helps businesses understand the financial implications of their recruitment efforts and allows them to budget effectively for staffing needs. It’s a critical metric for assessing the efficiency and cost-effectiveness of recruiting strategies, guiding decisions on resource allocation and optimization in human resources management.

What Does Cost per Hire Mean?

Cost per hire (CPH) is a critical metric in human resources that measures the total expenses involved in recruiting and hiring a new employee. This metric provides a comprehensive view of the financial investment required to attract, recruit, and onboard new talent. By understanding the various components that contribute to this cost, companies can gain valuable insights into the efficiency and cost-effectiveness of their hiring processes.

The cost per hire includes several vital components. Firstly, recruitment advertising expenses cover the cost of job postings on various platforms, including job boards, company websites, social media, and industry-specific sites. Crafting compelling job descriptions and strategically placing ads to attract qualified candidates requires time and money. 

Another significant component is the salaries of HR specialists or hiring managers who oversee the recruitment process. These professionals are responsible for screening resumes, conducting interviews, and negotiating job offers. Their expertise is invaluable but adds to the overall cost.

Companies that outsource their recruitment can pay substantial fees to external recruiting agencies. These agencies often charge a percentage of the new hire’s salary or a flat fee for their services. Additionally, screening and background checks are crucial to verifying a candidate’s qualifications, including their education, work experience, and criminal history. 

The HR team can do this internally or outsourced to specialized firms, contributing to the cost per hire.

Why Is Cost per Hire Important for a Business?

Cost per hire (CPH) is a vital metric for businesses, offering insights into the financial investment required to bring new talent into the organization. Understanding and managing CPH is crucial for several reasons: it impacts budgeting, strategic planning, efficiency, and overall business performance.

One of the primary reasons why CPH is essential for a business is its role in budgeting and financial planning. Companies can allocate sufficient resources for their recruitment activities by accurately calculating the cost per hire. This allocation ensures that the organization has the financial capacity to attract and hire the best talent without overspending. Knowing the CPH helps set realistic budgets for the HR department and can guide financial decisions throughout the fiscal year.

Cost per hire (CPH) is an essential benchmark for measuring the efficiency of the recruitment process. By analyzing this metric, businesses can identify which aspects of their hiring process are cost-effective and which need improvement. For instance, if a company notices that its CPH is significantly higher than the industry average, it might indicate recruitment inefficiencies.

Understanding the CPH allows businesses to compare hiring costs with industry standards and competitors. This benchmarking can provide valuable insights into whether the company is spending more or less on recruitment compared to others in the same sector.

How To Calculate Cost per Hire

The formula for calculating cost per hire is straightforward:

Your internal and external recruiting costs are divided by the number of hires over a specified time frame.

For example, if a company spends $200,000 on recruitment activities in a year and hires 50 new employees, the cost per hire would be $4,000.

Understanding the cost per hire is crucial for several reasons. Firstly, it helps companies budget and plan by clearly showing the average price of hiring new employees. This information enables businesses to allocate their recruitment budget more effectively and plan for future hiring needs. 

Secondly, by comparing their cost per hire with industry standards or competitors, companies can gauge their recruitment process’s efficiency and identify areas for improvement.

Key Factors in Calculating Cost per Hire

Internal Costs

Internal costs are the expenses that arise from resources and efforts within the organization. These include salaries and benefits for the HR team, time spent by hiring managers and staff on recruitment activities, and any internal training programs required for new hires.

External Costs

External costs refer to the expenditures incurred by using third-party services and resources. These costs include fees for job postings on various platforms, payments to recruitment agencies, and costs associated with background checks and drug testing

External costs also cover any spending on employer branding activities, such as career fairs and advertising, and fees for external training providers.

Total Number of Hires

The total number of hires is critical in calculating the cost per hire. This figure represents the number of employees brought on board during a specific period, such as a month or a year. Accurately tracking the total number of hires is essential for determining the average cost per hire, as it provides the denominator in the price per hire calculation.

Example of Calculating Cost per Hire

To illustrate how to calculate the cost per hire, consider the following hypothetical scenario. Suppose a company spent $50,000 on internal recruiting costs and $30,000 on external recruiting costs over a year and hired 20 new employees during this period.

First, add the internal and external costs together: Total Recruiting Costs=$50,000+$30,000=$80,000.

Next, divide the total recruiting costs by the total number of hires: Cost per Hire=$80,000/20=$4,000

Other Important Recruiting Metrics

Cost per Hire Comparable (CPHC)

The Cost per Hire Comparable (CPHC) is a variant of the traditional cost per hire metric. It focuses on expected costs across companies, making comparing recruitment expenses between different organizations easier. CPHC excludes unique costs such as immigration or relocation fees, which can vary widely and skew comparisons. 

By standardizing the costs in the calculation, CPHC provides a more uniform basis for evaluating and benchmarking recruiting efficiency across different industries and company sizes.

Recruiting Cost Rate (RCR)

The Recruiting Cost Rate (RCR) is another essential metric that provides a broader perspective on recruitment expenses relative to employee compensation. The RCR is calculated by dividing the total recruiting costs by the new hire’s first-year annual compensation and then multiplying by 100 to get a percentage. 

This metric helps companies understand the proportion of their investment in hiring relative to what the new employee will earn. A lower RCR indicates a more cost-effective hiring process, as it shows that the recruitment costs constitute a smaller fraction of the employee’s salary. The RCR is particularly useful for assessing the cost-efficiency of hiring for different organizational roles and levels.

Final Thoughts

Businesses looking to streamline their recruitment processes and ensure they make cost-effective hiring decisions must consider these metrics and continually evaluate and refine their strategies.

To further enhance your hiring process and reduce costs, consider utilizing ScoutLogic’s comprehensive background screening services. ScoutLogic offers a variety of search types tailored to meet your specific needs, ensuring that you hire the best candidates efficiently and effectively. Learn more about how ScoutLogic can help you by visitingScoutLogic’s background screening services.

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