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If you’re a Talent acquisition professional, understanding how to calculate cost per hire (CPH) is paramount to your hiring strategy. Knowing what it will cost you to source new talent can help you figure out where you should either cut costs (as is so often desired by your CFO), or where you’re able to invest more for high quality hires. Finding the right balance can cause headaches, so we’re here to help you make those data driven decisions.
What is “cost per hire?”
Simply put, “cost per hire” is the amount of budget that you spend on making a hire. If you’re wondering what that number might look like, the average CPH was $4,129 in a recent survey from Society of Human Resource Management (SHRM). This number will of course vary depending on your hiring needs, but it’s important to note that this metric is crucial to track when you’re putting together your recruiting budget.
The importance of measuring cost per hire
There are many factors to consider in the recruitment process, but CPH is essentially the most important metric for talent analytics. When you know your CPH, you can better determine where to invest your recruiting dollars, whether in people or tech like an ATS that can bring your recruiting to the next level. This type of strategic planning can potentially save your company money or allow for more spend to attract better candidates, which is imperative in today’s war for top talent.
How to calculate cost per hire
Figuring out how to calculate the cost of a hire can seem tedious and daunting. Here’s a breakdown for how you can assess this important metric.
External recruiting costs
You’ll first need to evaluate your external recruiting costs. Some external pieces might seem less important than others, but when added up you’ll see that they can really impact your overall spend.
External Cost Checklist:
- Staffing agencies
- Job boards and fairs
- Recruitment tech
- Advertising / marketing
- Candidate travel fees
- Background checks / drug testing
Internal recruiting costs
Now reflect inward and think about your internal recruiting costs. How much are your spending in-house?
Internal Cost Checklist:
- Recruiting teams
- Applicant tracking systems
- Recruiting learning & development
- Recruiter travel fees
- Employee referrals
After you decide which costs are most relevant, you’re ready to calculate your cost per hire. SHRM and American National Standard Institute (ANSI) created a standardized formula for crunching those numbers that will help your assessment.
You’ll need to divide the sum of your internal and external costs by the number of hires in a given time period, and voila, you have your CPH.
Image provided by SHRM x ANSI Cost-Per-Hire Standard Report
Okay, you’ve calculated cost per hire… now what?
Cost per hire is only one piece of the pie, and looking at it as a standalone unit can have its disadvantages. When you’re only assessing CPH, you may be so focused on the money, that you overlook quality of a hire. Top talent can be expensive, or take longer to acquire, but they often turn out to be successful, loyal employees.
Be sure to follow these 3 best practices so that you can effectively utilize your cost per hire metrics.
- Evaluate and then reevaluate: Track CPH regularly so that you can continuously assess fluctuations. Remember, an increase isn't always a bad thing. You may have invested more money in a hire in order to achieve a business objective, which can be a reflection of success.
- Cross examine: Compare CPH data by department to identify areas where you may be able to lower costs without causing damage to current processes.
- Look at the big picture: It’s important that companies measure CPH against other key metrics like quality of hire, or source of hire, such as employee referrals, and draw conclusions from the big picture for a more holistic understanding of recruiting success.
Learn about more helpful KPIs and metrics you can track to optimize your recruiting process in our 5 Recruiting Key Performance Indicators eBook.