What is Cost Per Hire and How Can We Calculate it?
Cost Per Hire is the average amount of money spent on making a hire.
Knowing it, and understanding it, is a key part of getting your recruitment budget under control. It’s a hugely variable number that can change based on a number of factors, so being able to track it consistently is vital.
We’ve got some simple explanations of what the cost to hire is, and how you can track it, to create a better understanding of your hiring strategy and team structure.
Why do I need to know my cost to hire?
Time to hire is a metric- one of many that a good hiring team should know
Cost to hire also has an impact on other aspects of the business, particularly SMEs. An inflated cost to hire can indicate issues in other areas of the business. On average, small business owners will spend 40% of their time on activities that do not generate profit- hiring being a part of this. [Source]
The cost to hire is a huge part of all HR costs. Knowing the number allows you to do several things:
Calculate the Return on Investment (Also known as ROI) of your recruitment strategy.
Track your spending over time
Forecast future spending
The trick isn’t necessarily to shave down costs for your hiring team- as mentioned, the cost to hire can be highly variable based on a multitude of factors beyond your control, and based on various tactics, strategies and goals. One month when you’re hiring a bunch of entry-level roles can wind up being cheaper than an extended period where you’re looking for a specialist. If your team is working well at their current budget, using Cost to Hire on its own to justify cutting things down could be damaging.
How do we figure out cost to hire?
Time to Hire can be calculated when you have a full picture of your costs
Here’s where the problems come in. Most guidance around your cost to hire will suggest to work out your HR team salaries and leave it at that. But this doesn’t factor in various other costs. Once you work out the costs of the various components of hiring, then you can figure out the true cost- down to the individual role.
For this article, we’ll divvy up different components into External costs and internal costs.
Internal Costs are the costs of recruitment that remain in house.
External Costs are the costs that go to vendors and people outside the company.
To be more specific…
‘Attracting and hiring great employees is one of the most essential functions of any HR department, but it’s also a costly endeavor’
Can include, but is not limited to:
HR salaries- Any team member who contributes to the hiring process should be considered here. Get them to self-evaluate roughly how much of their time in hours is spent on hiring, take their annual wage, and divide that by those hours.
Referral Bonus’ and Finders Fees- by the nature of referral bonus for employees, this one may not apply consistently, but you should still factor it into your average.
Infrastructure costs- what percentage of your office space is used for recruitment?
Development Costs- training for your HR team, and other ways to make them more effective.
Can include, but is not limited to:
Agency fees- most agencies charge around 20% of each new hires annual salary, which can get pricey quick.
Website fees- whether it’s your own, or from a job board.
Software Licensing- for ATS’ and other software you use to make recruitment easier
With both internal and external costs, do not factor in costs that come in after the hire has been made- those will be part of the onboarding process and should be regarded as distinct.
So what’s next?
The actual formula is simpler than you’d think
With all this information in hand, follow this simple formula to get your total cost per hire:
(External Costs + Internal Costs) / number of hires = Cost per hire.
Now that you have this number, what should you do next?
If it’s too high to be maintained, you may need to make cuts.
Here at Move, we charge a flat fee per month regardless of the number of hires you take on, so if you’re looking to cut down costs while bringing in a lot of hires, this could be an option. You can also look into other ways of refining, and thus reducing the cost of your hiring process- we’ve got plenty of guidance for that here on our blog.
If it’s too low to be effective, it might be time to increase your hiring teams budget, especially if the Time To Hire or Quality of Hires metric is also low.
Metrics are tools, powerful tools that can help you get a strong understanding of where your business is, and what it needs to develop. Don’t be put off by buzzwords, use cost to hire alongside other metrics, and you’ll have a clearer path forward with your recruitment strategy.