What is Cost Per Hire? – A Brief Guide

Recruitment is an important component for an organization and hiring the right talent is critical to the success of the organization. It not only influences the productivity and efficiency of the team but also has a direct impact on the profitability of the organization and company bottom line. One of the key metrics to measure the efficiency of the recruitment in the organization is cost per hire. In this blog we are going to discuss the significance, factors and strategies to improve cost per hire.

What is the cost per hire? How to calculate cost per hire?

Cost per hire (CPH) is a metric that measures the cost incurred by an organization in hiring a new employee. To calculate CPH you need to add all the external and internal costs associated with the hiring process and divide them with the total number of hires within a specific period. 

A formula for calculating a cost-per-hire:

Breakdown of CPH Components:

• Advertising cost: Cost incurred by an organization to promote the job opportunity in job boards, social media ads and recruitment events and fairs. You need to calculate the ROI of each advertising channel.
• Technology expenses: If you use software like applicant tracking system, recruiting software or HR software you need to take into account the cost of using these tools and only include charges incurred in automating manual recruitment tasks.
• Recruiter salary and benefits: it includes the compensation paid to internal recruiters and external recruiters or agencies (if any) who are specialized in hiring for executive and senior roles  and the additional cost of training the recruiters.
• Onboarding cost: it includes the cost incurred by the organization for training programs, orientation materials and other onboarding expenses such as employee kits. Also evaluate the impact of cost onboarding on long-term employee retention.
• Background check and screening: it includes cost associated with background check, pre-employment screening and reference check through external service provider
• Candidate assessment tool: It includes fees for using external tools and services like assessments, personality test, online mock test for determining candidates suitability.
• Travel and accommodations: This includes providing reimbursement to candidates who are required to travel for interviews or other hiring stages.

Why Does Cost Per Hire Matter?

• Impact on company bottom line: there’s a direct correlation between CPH and the financial health of a company. Every hiring decision has financial implications and cost per hire serves as a metric which assesses the impact on the company bottom line in a quantifiable way. A high cost per hire means the HR are inefficient in the recruitment process and a well-optimized cost per hire contributes to overall cost savings and positively influences the organizational financial performance.
• Importance in budgeting and finance planning: tracking cost per hire helps as a guiding factor in setting up realistic budgets for future recruitment initiatives. By incorporating cost per hire in financial planning, organizations can allocate resources efficiently and strategically. This ensures that the financial implication of hiring a candidate is taken care of and managed proactively fostering fiscal responsibility.
• Comparing different recruitment strategies: Recruitment is not a one-size-fits-all endeavor. Different companies deploy different techniques for recruitment to test out what works best for them and cost per hire helps them understand the financial burden and effectiveness of all the strategies. By comparing the cost of hiring candidates through internal or external sources, companies can gain insights in the efficiency of different recruitment strategies. This helps identify which methods are not only cost effective but at the same time yields high return.

Factors Influencing Cost Per Hire:

• Time-to-Fill: time taken to fill a role measures the efficiency of the recruitment process. An extended timeline may result in higher cost since it will prolonged job advertising expenses and extended use of recruitment tools. Moreover it also contributes to internal cost associated with the time and effort invested by the internal recruitment team in the hiring process.
• Sourcing Channel: Organizations utilize a spectrum of sourcing channels from traditional job boards to social media platforms, from employee referrals to hiring external recruitment agencies. Evaluating the cost effectiveness of each channel is crucial. While some of them might have higher charges but their ability to attract high-quality candidates make them more cost efficient in the long run. Balancing the use of diverse source channels is key to optimizing the cost per hire.
• Type of position: Different roles demand different strategies. For example, hiring for an executive level position may require organizations to hire external agencies to help them out and include higher compensation packages and a more extensive vetting process. Recognizing the cost dynamics for different roles enables organizations to tailor their recruitment strategies accordingly. Understanding these nuances is crucial for accurate budgeting and cost projections.
• Company reputation: company reputation in the job market also influences the ease with which an organization can attract candidates. Candidates are more likely to be attracted to a company if it has a positive brand image potentially reducing the external cost for sourcing. An organization should focus on investing in employer branding, cultivating a positive brand image and maintaining a favorable brand presence online to contribute to building a robust reputation positively impacting cost per hire in the long run.

Strategies to Optimize Cost Per Hire:

• Leverage technology: implementing technology in your recruitment process can significantly impact cost for hire by automating repetitive tasks, improvising efficiency and reducing manual efforts. You can:
  – Applicant tracking system: Organizations can implement an applicant tracking system to streamline their entire recruitment workflows from job posting to candidates onboarding. These tools can help automates manual tasks and reduce errors and accelerate the time to fill and efficiently manage the candidate date and communication process.
  – Data Analytics: Utilizing data analytics tools to track and analyze recruitment metrics help identify and make informed decisions based on data which eventually helps identify areas for improvement and areas for optimization.
• Effective Sourcing: this strategy involves utilizing a mix of cost effective channels to attract talents for the organization. This includes using employee referrals to refer potential candidates to the organization which in turn result in good quality hires with reduced external sourcing cost. Tapping into internal teams for potential promotions and placing them in a different leadership role to reduce hiring cost and improved employee development. Organization can also partner with college and educational institution to hire talents at lower external cost.
• Streamlined process: you need to have efficient recruitment workflows in order to minimize downtime and reduce cost so as to improve the cost of overall candidate experience. You need to:
  – Design efficient workflows to define processes to recruitment staff thereby reducing the time it takes to move candidates through various stages contributing a shorter time to fill.
  – Promote effective communication and collaboration among hiring teams to ensure that all team members are aligned on the hiring criteria, reducing the likelihood of delays and miscommunication.
  – Conduct regular recruitment audits to identify bottlenecks, inefficiencies or areas of improvement to refine the process of recruitment.

Impact on Cost Per Hire and Recruitment Expenses:

The financial impact of a bad hire is substantial, affecting not only the initial recruitment cost but also potentially increasing the overall cost of hire in the long run. 

• Training cost: investment in training a new hire who eventually proves to be a poor fit impact the cost associated with training including onboarding materials, trainer cost and mentorship.
• Productivity: the impact of team productivity as a result of bad hire inability to contribute to the team and the success of the organization, not only it delays the time to get things done but if they get terminated due to low performance the organization needs to re-hire again eventually repeating the same recruitment process again.
• Client and customer impact: a poor performing employee can impact the client relationship and customer satisfaction as he/she will not be able to handle the task properly but face difficulty in handling customer queries giving a bad reputation to the organization.
• Extended time to fill: the time taken to rehire and fill the vacant position contributes to the increased external cost due to prolonged job advertising expenses, extended use of recruitment tools and recruitment agencies, sourcing new candidates, conducting the interview and background check again etc.

Tools and Metrics to Track Cost Per Hire:

1. Time-to-Fill: This metric measures the number of days it takes to fill a job vacancy from the moment it’s posted to the candidate’s acceptance of the offer. A longer it takes to fill a role the longer will the advertising and external cost

2. Cost-Per-Interview: Cost-Per-Interview calculates the average cost incurred for interviewing the candidates during the interview stage. 
3. Quality of Hire: This is crucial to the success of the organization as it assesses the overall performance of the employee in the organization. It is not immediately quantifiable but understanding the cost help evaluate the long term cost of recruitment
4. Source Effectiveness: These metrics help identify the performance of different channels of recruitment in terms of delivering high quality candidates. This means if a channel has more money but provides great talents then it is cost efficient and the organization should allocate a budget in hiring from these channels.
5. Benchmarking against industry standards: Benchmarking cost per hire and related metrics against industry standards provides context for understanding the competitiveness and efficiency of the organization recruitment process. And pinpoints areas of improvement and provides new methods of recruitment.
6. Regular reviews: establishing a review cycle for recruitment ensures that recruitment team stays agile to changes in talent market and establish new policy and adopt new techniques to hire new talents. Regular reviews also help refine the performance evaluation strategy based on going employee contribution and success of the project.