Cost per hire is the average expense you made for hire. This recruitment metric is useful for tracking your recruiting funds. The average cost per hire in the US is $4.000,00 and €4,494 in Europe.
Tracking your cost per hire can help you improve your recruiting ROI. Companies can use this metric to determine budget and strategy for sourcing, the best source of hire, or to measure recruiters’ performance. Unfortunately, only 41% of companies regularly track costs related to hiring. The best part about this recruitment metric is that SHRM standardized it.
Steps to Calculate Cost per Hire
To accurately calculate the Cost per Hire of your organization, you need to determine the internal and external costs associated with recruitment. To summarize, these are the steps to create Cost per Hire report:
- Define a specific period concerning which you want to calculate Cost per Hire
- Define a suitable Cost per Hire Type for your organization
- Calculate Internal Costs
- Calculate External Costs
Cost per Hire Metric Types
The type of cost per hire metric depends on the size of your organization and the KPIs you have set. You can choose between three types as follows.
- CPHI, Internal measures the costs for a particular organization.
- CPHC, Comparable, is appropriate for comparison across organizations.
- RCR, Recruiting Cost Ratio is suitable for comparing the total cost of hiring against the total compensation of the newly hired individuals in the first year of their employment.
The Basic Cost per Hire Formula
The Internal CPH metric measures the costs associated with the sourcing, recruiting, and staffing activities of an employer to fill an open position. CPH is a ratio of the total amount spent on the total number of hires in a specific period. You shouldn’t include data on freelancers or outsourced workers. The formula should consist of costs correlated to the same period. Here’s what it looks like:
What to Include in Cost per Hire?
Quite much everything you usually spend on recruiting. Creating a comprehensive list of potential recruiting expenses will help you build a precise spending plan. As shown in the CPH Formula, Costs may be internal and external.
External costs incorporate everything your company pays to external vendors or individuals for recruiting. Think about job boards, social media ads, recruitment agencies, background checks, and much more than this. Expenses may include, but are not limited to:
- Advertising and Marketing Expenses, Job Boards for Example
- Background Checks and Eligibility to Work Expenses
- Campus Recruiting Expenses
- Consulting Services
- Contingency Fees
- Drug Testing Expenses
- Employee Referral Awards
- Immigration Expenses
- Recruiting Events Expenses
- Pre-hire Health Screens
- Pre-screening Fees
- Recruitment Process Outsourcing (RPO) Fees
- Relocation Fees
- Sourcing Costs, Licences like LinkedIn
- Travel and Expenses
- Technology Costs
- Third-party Agency Fees
External costs charged annually are limited to the period selected. Example: Recruitment Process Outsourcing Fee is $36,000 annually, and you’re researching six months. This cost would be calculated as $3,000 / 12 months x 6 = $18,000 for the 6 months.
Internal costs cover all of the in-house resources supporting hiring. These expenses may include, but are not limited to:
- Cost of Recruiting Staff
- Cost of Sourcing Staff
- Internal Overhead for Government Compliance
- Office Costs (actually, this one is quite funny, cause it refers to how much space your recruiters are taking)
- Recruiting Learning and Development
- Secondary Management Cost of Time for Events – refers to Hiring Managers time spent on Events
- Secondary Management Cost of Time for Recruiting – refers to Hiring Managers’ time spent on interviewing.
Comparable Cost per Hire – CPHC
If your company has multiple office locations, you can use Comparable Cost per Hire. To calculate Cost per Hire across the organization, use the same formula we presented before.
BUT there is a trick.
External Cost variables stay the same. However, Internal Costs are limited to:
- Total Cost of Recruiting Staff Expenses
- Total Cost of Sourcing Staff
- Non-labor Office Costs
- Recruiting Learning and Development
Recruiting Cost Ratio
Usually, companies analyze the cost of hire by the number of hires for a specified period. But, if you want to analyze the costs of hire by the total compensation of hires for the period, you should use the Recruiting Cost Ratio. To calculate Recruiting Cost Ratio, use this formula:
Unlike CPHI and CPHC, RCR will give you percentages. For reference, you can conclude that for each $1, your organization spent 10 cents on talent acquisition.