The best HR professionals know that hiring must delicately balance quality and cost.
Yes, your organization wants to find the best candidate available, but hiring is still an economic consideration.
A sustainable business can’t survive if it’s overspending on talent acquisition.
This begs the question…How much does it cost your company to hire a new employee?
Although the answer seems simple on the surface, breaking down all of the investments that go into onboarding talent can be quite complicated.
Properly determining your organization’s cost per hire is an important key performance indicator (KPI) to track if you want to make better decisions.
We built this guide to help HR professionals take the guesswork out of calculating and interpreting cost per hire for their company using real-world examples, including some valuable tips to improve hiring costs.
But don’t let our laser focus on expenses in this article fool you.
TestGorilla is all about helping organizations source qualified talent. We just know the power of pre-employment skills assessments to lower costs and raise candidate quality.
Let’s dig in.
Table of contents
- What is cost per hire?
- Why is it important to HR professionals?
- How do you calculate cost per hire?
- What does your organization’s cost per hire tell you?
- How to optimize your average cost per hire: 7 proven tips
- 7 tips to optimize your cost per hire
- 1. Track cost per hire against benchmarks
- 2. Split up cost per hire by hiring source
- 3. Compare results internally by department and position
- 4. Consider quality and timing to get a full picture
- 5. Turn to lower-cost hiring methods
- 6. Commit to skills-based hiring practices
- 7. Add context to the KPI
- Reduce cost per hire with skills-based hiring
What is cost per hire?
Cost per hire is a metric used by HR organizations to quantify the average expense to fill a role with a new employee. It is calculated by dividing total recruitment costs by the number of employees hired.
The cost per hire formula looks like this:
Cost per hire = Total recruitment costs / Number of new hires
Recruitment costs include internal and external expenses that a company incurs to attract talent and fill an open job position.
Cost per hire is a useful metric for evaluating the efficiency of an organization’s recruitment process. By monitoring cost per hire trends, companies can make changes to improve their recruitment strategies and lower costs.
Why is it important to HR professionals?
Cost per hire is an important metric for HR professionals to track because it presents a barometer of the efficiency of a company’s hiring process.
Tracking cost per hire over time enables an organization’s in-house hiring team to determine what parts of the hiring process are contributing to outsized expenses.
Here are some of the most common benefits HR professionals cite with monitoring cost per hire over time:
- Cost savings: Using cost of hire data, companies can identify areas where they can reduce recruitment costs and shift strategies (for example, lessening reliance on outside agencies in favor of employee referrals).
- Improved budgeting: Companies with a clear understanding of cost per hire are able to better forecast expenses and plan their recruiting budgets accordingly. This can help avoid unexpected financial outcomes and ensure they have the resources necessary to recruit top talent.
- Improved recruiting efficiency: Tracking cost per hire can help businesses resolve bottlenecks in the hiring process leading to faster time to fill. Cost per hire also acts as a benchmark for comparing HR performance.
- Better candidate quality: By monitoring cost per hire, organizations can identify which recruitment channels bring in the best talent and shift resources accordingly.
The important takeaway from all of these is that measuring cost per hire enables your company to make data-driven decisions when it comes to the hiring process.
How do you calculate cost per hire?
Although the formula to measure the cost of hire might be simple, understanding all of the contributing costs is rather complex.
You might have questions like:
- Does the time interviewers take out of their day job count as a cost?
- How about the fees job boards charge to list an open position?
- Are there expenses to consider if an existing employee referred a new hire?
To answer all these and more, let’s look at a detailed version of the cost per hire formula and then break down each variable with clear examples.
Cost per hire = (Internal recruiting costs + External recruiting costs) / Total number of hires
Internal recruiting costs
|Examples of relevant costs||Definition|
|Hiring manager costs||Costs associated with the time a hiring manager spends to recruit and onboard a new hire|
|Recruiting staff costs||The total cost (salary, bonuses, and benefits) of your recruitment staff|
|Training and development expenses||Training costs associated with ongoing efforts of HR staff|
|Compliance costs||Any expenses related to processing hiring documents (for example, legal or immigration papers)|
|Administrative costs||Miscellaneous costs associated with supporting the hiring function such as office equipment, rent, and other overhead|
External recruiting costs
|Examples of relevant costs||Definition|
|External recruiters and placement companies||Costs paid to outside parties that source candidates for an open role.|
|Job board fees or other marketing expenses||Fees or expenses paid to market an open position so candidates can find out about the role and apply. This might include channels such as paid job boards, job fairs, or even social media recruiting.|
|Pre-screening costs||Costs related to screening applicants for quality and fit (including pre-employment skills assessments).|
|Background checks||Expenses incurred to look into an applicant’s past. For example, completing job references, confirming their education and credentials, conducting a criminal background check, or confirming their immigration status.|
|Referrals or signing bonuses||Any incentives provided to existing employees (in the case of a referral program) or joining employees (in the case of a sign-on bonus) to secure a new hire.|
|HR technology and software costs||Subscription fees and technology expenses related to HR processes such as applicant tracking systems or candidate assessment software.|
Total number of hires
To gauge recruitment costs on a per-employee basis, we need to divide internal and external recruiting costs by the number of new employees hired.
Depending on the goal of the analysis, your HR organization might alter the denominator to look at costs in a few different ways:
- Include internal and external hires to assess costs across all employees. Alternatively, only include new hires from a specific hiring channel.
- Include all types of employees across full-time positions, contractors, temporary staff, and outsourced support staff. Or only include one type of employee for a specific analysis.
- Include new hires who were onboarded over the last year. Or, isolate a different time period (for example, only hires made over the last quarter).
Although there is no “right” way to look at cost per hire, it is important to match costs in the numerator with the type of employees hired in the denominator.
Calculating cost per hire using a real-world example
To bring this to life, let’s use a hypothetical example with real numbers.
Imagine you are an HR professional at a large tech company in San Francisco, and you’ve been tasked with calculating the cost per hire for last quarter’s recruiting efforts.
Here is what you would plug into your cost per hire calculator:
|Cost per hire variable||Components||Total|
|Internal recruiting costs||Hiring manager costs: $3,800Recruiting team costs: $8,700Compliance costs: $1,000||$13,500|
|External recruiting costs||Background screening: $7,400Sourcing costs: $3,500Job posting costs: $10,000Placement agency: $4,200Technology and software: $7,400||$32,500|
|Total cost||Internal and external recruiting costs||$46,000|
Furthermore, these costs are allocated over a total of 10 new hires that the team made last quarter.
The resulting cost per hire would be $4,600 per employee on average.
The actual cost per hire for your organization depends heavily on factors such as:
- Job location and cost of living
- Skill level
- Seniority of role
- Type of employee
- Position or function
Although it works out that our example resulted in a calculation that’s close to the $4,400 average cost per hire, your results will be different.
Recruiting cost rate: A helpful secondary metric
Recruiting cost rate (RCR) is a helpful KPI to consider alongside cost per hire to measure the cost-effectiveness of your recruitment efforts.
It is calculated by dividing the total recruitment costs in a given period by the total compensation for new hires during the same period.
Recruiting cost rate = Total recruitment costs / Total compensation for all new hires
By expressing hiring costs as a fraction of total compensation, RCR provides insight into the productivity of a recruiting process.
A low value indicates a company that attracts talent effectively, whereas a high value suggests inefficient spending for the level of compensation paid to employees.
For example, even though senior-level positions are harder to fill and can be more expensive to recruit, the recruiting cost rate helps organizations find an efficient balance of spending for roles at any level.
What does your organization’s cost per hire tell you?
The cost per hire for your company is only helpful if you have something to compare it against.
That way, your business can see whether the result is abnormal, which would mean something needs to be changed about the hiring process.
One of the most effective ways to gain insights is to track trends in your company’s cost per hire over time. If the metric jumps up, it could indicate inefficiency in the hiring process, meaning you should look further into what is causing the uptick.
Alternatively, you can also compare your company’s cost per hire to benchmark rates for your specific industry or the broad market.
For example, how do we know if our technology company has a good cost per hire or not?
One way is to see how it stacks up against broad industry data:
We can see that our total cost of $4,600 is above average.
Then we can use this comparison to evaluate whether the result is out of the ordinary for a high-skill and high-cost-of-living area.
The disadvantages of cost per hire and quality of hire’s essential role
Although cost per hire is a helpful metric, it’s important to remember that lowering costs should not be the only goal of an HR organization.
Let’s say your company has a low cost per hire, but the employees you are hiring are poor performers with short tenure who generally quit within one year on the job. The cost per hire formula doesn’t capture the full cost of a bad hire.
And, even though the cost per hire metric is sending green signals, the actual outcome is a mess.
That’s because we’re forgetting about the other side of the equation: quality per hire.
We’ve written extensively on this topic before, so we encourage you to read further on how to improve the quality of hire at your company.
Overall, the main goal is to hire the best possible talent for the best value.
This is a combination of efficient hiring costs and recruiting highly skilled and effective employees.
How to optimize your average cost per hire: 7 proven tips
Now that we’re clear on what cost per hire is, how to calculate it, and how to use it properly, let’s cover some tips to make improvements.
7 tips to optimize your cost per hire
Use these proven strategies to get more insights out of your HR data and improve your company’s recruiting process.
|Best practices to optimize cost per hire||Why you should do it|
|Track cost per hire against benchmarks||Benchmarks help your organization determine a healthy range for cost per hire.|
|Split up cost per hire by source||Different hiring sources naturally have different costs. Analyzing cost per hire by source gives your company better insights.|
|Compare results internally||Cost per hire is easier to interpret when calculated for similar roles within your company.|
|Consider quality and timing for a full picture||Expenses need to be balanced against metrics that measure candidate quality and time to hire.|
|Turn to lower-cost hiring methods||By analyzing cost per hire, your organization can identify which hiring methods are most efficient.|
|Commit to skills-based hiring practices||Skills-based hiring practices not only save time and money but give you a better sense of candidate quality.|
|Add context to the KPI||The calculation of your company’s cost per hire should be considered in relation to market and industry trends.|
Now, we look at each suggestion in more detail.
1. Track cost per hire against benchmarks
The key to interpreting your business’ cost per hire is to compare the results to other reliable industry benchmarks.
This can be your own company’s data – for example, comparing this quarter’s cost per hire to the trend over time – or it might be a benchmark of average cost per hire by industry.
Comparisons like these help your company make accurate assessments of the efficiency of your hiring process.
However, it’s important to remember that the inputs for calculating cost per hire can also be influenced by factors in the general economy and labor market that are beyond your control.
For example, many companies found it harder to hire talent efficiently during the Great Resignation. A cost per hire metric that’s trending up might say little about your organization and more about labor market conditions.
2. Split up cost per hire by hiring source
When you analyze cost per hire at more granular levels, it can give you greater insights about your HR organization.
One way to do this is to isolate recruitment expenses and new hires based on recruitment sources.
For example, you might break down your cost per hire data based on channel:
- New hires sourced from employee referrals
- New hires sourced from external recruiters or recruiting agencies
- New hires sourced from paid job boards or recruiting software
Investigating cost per hire for each channel might reveal that employee referrals are far more efficient in terms of cost and number of employees hired. In fact, on average, employee referral programs shave off $1,000 and 13 days from the hiring process.
In this case, your company might reorient resources to focus on more productive channels and scale back on inefficient hiring sources.
3. Compare results internally by department and position
Another way to make cost per hire results more specific is to analyze data for different departments or job positions.
You might find that the cost per hire for a software engineering position is higher than the cost per hire for a customer service role.
One isn’t necessarily better than the other, but blending departments together obscures the variability of costs across your organization.
Instead, it is easier to derive insights when you compare cost per hire for specific roles.
4. Consider quality and timing to get a full picture
To get a complete picture of your recruiting efforts it’s important to consider cost per hire in relation to time to hire and quality of hire.
As we’ve mentioned before, a low cost per hire isn’t necessarily a good indicator if new hire performance ends up being poor or candidates take forever to move through your recruiting funnel.
One of the best ways to improve hiring quality and timeliness is to use pre-employment screening tests.
When skills assessments are used as part of the hiring process, employers are able to effectively focus on the most qualified candidates. Thereby saving precious recruiting time and making it easier to assess the best talent.
5. Turn to lower-cost hiring methods
Honing in on the individual expenses that contribute to cost per hire helps organizations uncover more efficient hiring methods.
When you look above at the internal and external recruitment cost inputs covered previously, it’s easy to see how some hiring methods might contribute more costs than others.
For example, many job boards charge upwards of $399 to post open job positions, and often for a limited time. Multiply this across multiple job websites and positions and expenses quickly add up.
Understanding the contribution of each item to the total cost per hire can help your business turn to lower-cost hiring methods such as encouraging internal mobility.
Transferring, promoting, or cross-training current employees saves time and money that would otherwise need to be spent attracting and vetting external candidates.
6. Commit to skills-based hiring practices
Moving more candidates more efficiently through the hiring process is the ultimate goal when optimizing your cost per hire.
But filling open positions with quality talent without spending lots of time and money to figure out if they are the right fit is no easy task.
One effective way to vet talent productively is to use a skills-based hiring process that focuses on candidates’ capabilities rather than using resumes or extensive qualifying interviews.
Skills-based hiring improves the quality of hires across the board and limits bad hiring decisions, saving companies money in the long run.
Plus it helps reduce reliance on expensive external recruiters and resume screening software while delivering more accurate assessments of candidates’ strengths.
In fact, over 89% of employers surveyed in our 2022 State of Skills-Based Hiring Report saw a reduction in total cost per hire when using skills-based hiring practices.
Apart from the cost benefits, skills-based hiring also enables companies to access wider talent pools and hire more diverse groups of people by eliminating subjectivity and bias.
7. Add context to the KPI
A movement up or down in cost per hire at your organization isn’t necessarily a good or bad indicator on its own.
We mentioned already how cost per hire should be considered against broader labor market conditions, but it should also be considered relative to hiring initiatives and investments your company is making.
For example, if your business is ramping up recruiters ahead of an expected hiring binge, elevated costs will be borne now while the denominator (number of hires) might not increase until next quarter.
Rather than reporting on cost per hire in a vacuum, add context and explanations to understand why the KPI is reading one way or another.
Reduce cost per hire with skills-based hiring
In this guide, we explored what the cost per hire metric means for companies and how they can use it to improve their hiring practices.
By tracking cost per hire, HR organizations can make data-driven decisions to change hiring sources, reduce inefficient recruitment costs, and focus on practices that ensure both high-quality candidates and lower expenses.
However, cost per hire isn’t the only measure a well-functioning HR practice needs to watch closely.
Besides hiring talent efficiently, your business also wants to do things like:
- Retain the best employees you spent all that time and money hiring
- Limit the number of mis-hires that lead to costs and lost productivity down the line
- Create a rewarding and engaging work culture that attracts amazing applicants
When you’re ready to take on these goals next, check out our guide for recruitment best practices when hiring top talent, and sign up for your free plan with TestGorilla today