Recruitment Metrics: Cost per Hire Explained
Cost per hire is one of those metrics that shows you whether you are doing it right. Understanding recruitment costs is one of the most critical aspects of establishing an effective hiring process and maintaining an efficient talent pipeline. Maintaining a proper cost-per-hire ratio is one of the integral elements of keeping a cost-effective recruitment process.
In our recent articles, we have talked about recruiting costs in general. This time we will look at the cost per hire, how it reflects the recruitment process’s efficiency and why it is critical to keep it under control.
What is the Cost per Hire?
On the surface, defining cost per hire seems rather obvious – it is the amount of resources invested into hiring for a specific position. But there is more to cost-per-hire than meets the eye.
- Cost per hire (aka CPH) is the total ratio of expenses to the number of hires involved with filling a particular position. It consists of a total number of hires divided by external\internal expenses.
Take a look at some CPH figures from recent Bersin by Deloitte research:
- Banking/Financial Services – $4,323
- Technology – $4,325
- Business Consulting – $4,300
- Healthcare – $3,033
Overall, the definition of cost-per-hire relates to its purpose. In this context, there are three types of cost per hire:
- Internal Cost-per-Hire – costs to the number of hires specific for a single organization.
- Comparable Cost-per-Hire – costs to the number of hires designed for comparison between different companies. For example, to compare Microsoft and IBM cloud department CPH.
- Recruiting Cost Ratio (aka CPH everyone thinks about when they hear CPH) – a total cost of hiring against the newly hired individuals’ total compensation in the first year of their employment.
Cost-per-hire Components Explained
Cost per hire includes such components as:
- Financial expenses (for example, $1k for recruiter’s salaries + $1k for operational spending + $500 referral bonus + $1k in the recruiting agency fees, and so on);
- Time investment (for example, 4 hours spent on researching the position, 6 hours on sourcing, then one hour+ on interviewing candidates, etc.);
- Productivity losses related to vacancy. Technically, it is more of “missing out” than outright losing profits. Because of that, productivity losses are usually not figured into cost per hire figure. It is more of an additional metric.
- Productivity losses mean the specific department’s diminished capacity and increasing workload for the remaining employees (you can read more about it here). For example, in the case of business development, productivity loss can be a lesser capacity to process incoming queries and handle follow-ups.
- Productivity losses are tricky as they require really well-structured workflows to calculate the impact of a particular position on the company’s business;
- Candidate’s salary (rough estimation for a foreseeable period);
You can read more on CPH contributing factors down below.
It is also crucial to understand that cost per hire doesn’t cover post-hiring expenses – such as onboarding, training, workplace setup, and other things. Post-hiring expenses are a thing of their own, and it is a subject for a separate discussion.
Why is it Important to Keep Track of Cost per Hire?
Efficient recruitment operation depends on the properly planned budget – you can’t just shoot from the hip until you strike gold.
A properly planned budget means the following: a vision and clearly-structured plan of how much your company is willing and ready to spend for a particular operational aspect to get the thing done. In other words, it is a manual for a balancing act.
Overall, CPH contributes to the optimization of the following aspects of recruitment operation:
- establishing sourcing strategy/budget;
- optimizing talent planning strategy;
- determining sources of recruitment cost-effectiveness;
- measuring and comparing the hiring performance of different recruiters;
- defining quality-of-hire metrics;
Thus, tracking the cost per hire ratio is critical in effectively defining budget requirements for the recruitment effort’s particular aspect and determining a cost-effective recruitment workflow.
And when the budget requirements are clearly structured and foreseen – it enables a full-fledged talent planning pipeline.
Here’s an example:
- The company is planning to expand its team with ten more employees during the next year.
- Thus average CPH figure revolves around $2k, which means that the recruitment operation would require $40k to handle the plan.
Cost-per-hire as a recruitment effectiveness indicator
The other important aspect of cost per hire is that it is an easy effectiveness indicator of the recruiting effort.
- It is a surefire sign that something is not right with your recruitment operation if the CPH figures dance like a drunken sailor.
- CPH analysis can point out the hiring process’s weak spots the best possible way – by tracking where the money goes and for what.
- Because of that, CPH statistics can assist with optimizing the recruitment process – fine-tuning its workflows and overhauling its mechanics;
Keep in mind, cost-per-hire is not the only recruitment metric you should keep your eye on. In fact, it is not much of use in isolation from the other recruitment metrics, such as:
- Time per hire;
- Time to fill;
- Quality of hire;
In addition to that, CPH figures do not tell the whole story regarding the recruitment operation. They show the costs but don’t explore the context that motivates them. And that’s critical.
Cost per Hire Example
- Your company intends to hire elite-level candidates nice and fast and then retain them for an extended period. Such a task doesn’t exactly scream exercising a sense of thriftiness. It takes considerable time and effort to find and process such candidates.
- Thus the cost per hire ratio would be higher than the industry average. However, it would help if you minded the context for this high CPH:
- High-profile candidates have a certain level of expectations and requirements for a new employment option. It would be best if you covered that to keep them engaged throughout the recruitment process (doing custom salary surveys helps optimize your value proposition, but it is another story).
- Subsequently, you need to up the ante to retain these specialists over time—things like salary increases, promotions, and the likes.
- Next, faster turnaround contributes to high CPH as it might involve additional spending to find viable candidates – such as reference bonuses.
- However, it all pays off if the quality of hire is on the level. Let’s look at what makes a good quality of hire ratio:
- Employee engagement;
- High performance;
- Further career development;
- Low employee turnover;
How does Cost per Hire works? Formula Explained
Here’s how the CPH formula works:
- A total number of hires made in the evaluation period (year, Q1, Q2, week, etc.) and divided through total external and internal expenses figures.
Here’s an example of how to count cost per hire. These are very rough estimates:
- Let’s take abstract yearly vacant position salary of $12k with $1k per month.
- The recruiter’s salary is approximately $1,5k. Add a percentage for a closed position – it is somewhere around $300-400 per vacancy. Let’s take one for clarity. That’s going to be $1,8k.
- Then, add staff-hours for conducting sourcing/interviews – the hiring manager’s hourly rate is approximately $20-30. For example, 2 hours per day for 2 specialists over 2 weeks – that is 10 hours over 5 working days per specialists – 40 hours for 2 specialists during a 2-week period. Add a $20 hourly rate, and you get $800 overall. Now it’s $2,6k
- Next, software costs. Sourcing tools costs around $100 per month. Then we have job boards – the average price of the post is $20. For the sake of clarity, we’re going to stick to one job board post plus one sourcing tool. That’s going to be $2,720
- Also, add the commodities costs – internet (approx. $50), electricity (approx. $50), and the likes. Now it’s $2,720
- Furthermore, the hiring process may involve referrals. Let’s say the referral bonus is $500.
- Here’s what we are going to have in the end – $15220 Recruiting Cost Ratio.
Important, this figure excludes productivity losses as it is a metric of its own that relates to cost-per-hire but requires its workflow to get it right.
Now let’s take a look at two cost factors that affect CPH.
Cost-per-hire External Cost Factors
The external costs are all sources of spending outside the organization on recruiting efforts. This includes:
- Position level – hiring C-level is more challenging than hiring an entry-level junior specialist. The hiring process for CEO is longer and requires more stages than hiring a social media manager. There are more staff involvement and more time spent to get it done.
- In fact, executive search is pretty much a thing in itself that requires an entirely different approach.
- Position type and demand – in-demand specialists (web developers, data scientists, business analysts) are hard to get and require an additional effort to keep them around. This aspect means more time for interviewing, a better value proposition to stay above the competition (regarding compensation package competitiveness, it also involves market research and salary survey costs). That can contribute significantly to the end CPH figure.
- Industry niche – in the case of the IT industry, the cost per hire figure can drift vastly from niche to niche.
- Scope of recruitment effort also contributes to CPH figures. In a nutshell, cost-per-hire is lower if the scope of operation is bigger as the required resources and workflows are in more efficient use. In contrast, when the recruitment effort’s scope is smaller – the costs are higher.
- Geographic factors – finding and hiring tech talent in big tech cities (for example, Kyiv/Ukraine or Warsaw/Poland) is easier due to a deeper talent pool and networking possibilities. It is much harder to find candidates for relocation, especially remote locations (like relocation to New Zealand or Africa).
- The switch towards remote work somewhat mitigated this factor as remote work opens up more opportunities for composing distributed teams. However, it puts an additional load on the workflow and its efficiency in such configuration (and that might be quite challenging to pull off);
Cost-per-hire Internal Cost Factors
The internal costs are all sources of internal resources and costs. This includes:
- Interview costs – time spent preparing, conducting, and following up on one interview session for each involved party from the company (i.e., recruiters and other specialists – CTO for tech positions or Marketing Manager for marketing positions). It multiplies per specialist, candidate, and stage.
- Candidate assessment costs – activities to check the candidate’s viability for a position, hard and soft skills in particular. It involves the preparation of the assessment pipeline (tests, surveys) and its subsequent checking. Similarly, it multiplies per candidate and specialists.
- Recruitment marketing costs – includes posting vacancies on job boards, setting up promotion campaigns, arranging events, etc.;
- Recruiter’s salary / Recruiting agency fees;
- Referral bonuses – this one is often a dealbreaker for many vacancies, especially if the recruiter keeps their networking far and wide. But it comes at a cost, and you need to keep it under control.
- Operational costs + service subscription fees – money spent on software to enable proper recruitment operation. Things like Applicant Tracking System, messaging tools (Skype, Zoom, and the likes), time tracking, task management tools, and so on.
- Operational costs also include work environment spending. With many companies switching to remote – this became a more significant factor.
- Employer branding costs – the more you invest in your employer’s brand, the less you need to invest into recruitment. The power of your brand maintains a significant chunk of the workflow (attracting and engaging potential candidates).
The manageable cost per hire is one of the integral components of the effective hiring process. When done right, it illustrates the recruitment operation as a well-oiled machine that does exactly what it is supposed to.
Next time, we will explore another recruitment metric – time to hire. Stay tuned.
If you need help taking your cost-per-hire under control or want to consult regarding recruitment metrics in general – contact our HR consultants for further information.