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How to calculate cost per hire to optimize recruiting

The cost of onboarding a new hire can get expensive, and if you’ve never estimated how much your company is spending on it you may be surprised. 

When you analyze your decisions and spending in the hiring process, you can create a cost of new hire estimates that help you to make informed decisions in the future, ranging from improved efficiency to more-accurate budgetary preparation. This allows you to make your company more productive and helps to improve your bottom line. 

In this article, you’ll learn what cost per hire is, why it is essential to your business and how it’s calculated, and a cost per hire example to demonstrate.

What is cost per hire?

Your company’s cost per hire is exactly what it sounds like — the average amount of money spent on each new hire brought into the organization. While the concept may be simple, understanding the nuances requires a bit of a deeper dive. Not all costs associated with hiring are apparent until you take time to breakdown all the work and resources that are required to post a job, assess applicants, and onboard the recipient of the position. 

It’s important not to overlook any potential costs when performing your calculation, or else you will miss out on the possible opportunity to improve in those areas, and you will end up with an inaccurate estimate of your cost per hire.

What are recruiting costs?

There are many costs to consider when calculating your cost per hire, and not all of them come in the form of direct spending that appears on the balance sheet. A standard method of approaching recruiting cost calculation is to break your costs into two groups, internal and external costs. External costs are spending and resource investment in entities outside of your company, including:

  • Staffing agency fees
  • Job fair placement fees
  • Recruiting technology costs
  • Job opening advertising
  • Applicant travel costs
  • Applicant screening costs
  • Relocation compensation
  • Signing bonuses

Some of the costs of recruiting are focused on the staff you already have or are hiring. These internal costs include:

  • Portions of salaries paid to staff involved in the recruiting process
  • The cost of training programs
  • Lost productivity during training
  • Recruiter travel costs
  • Referral bonuses

Your company’s recruiting process will determine how much of your costs are attributable to each expense. The more thorough you are in assessing the costs of your recruiting when calculating cost per hire, the more accurate your resulting calculation will be.

How to calculate cost per hire

While that may seem like a lot of considerations to keep in mind when running your calculations, the good news is that once you’ve gathered your various sources of spending, it’s easy to perform your calculations. 

Add up both your external costs and internal costs on all new hires in a given period. Divide the resulting number by the total number of hirees in that same period, and you have found the cost of onboarding a new hire, from identification to assessment and on through hiring and training.

Why does cost per hire matter?

Your company’s cost per hire expenses are important to know for the ability to reduce your overall spending and to refine the areas where you are spending your resources. One effective use of cost per hire is to calculate isolated spending among different factors. When you do this, you can identify areas where you are finding winning candidates efficiently and others where you are less effective, and either opt to change the way you approach the latter or cut funding to them altogether.

How do you use cost per hire?

Calculating your cost per hire is only a worthwhile experience if you take the information you gather and use it productively. When properly implemented, cost per hire calculations create a guide when allocating resources to recruiting. Here are the key steps to take when calculating cost per hire to get the most value out of the process:

  • Quantify your cost per hire 

The more detailed information you can have on cost per hire, the more valuable it will be for you. This means not just finding your overall costs, but also itemizing your costs based on the different areas of spending. This information can be combined with additional metrics such as stats on how many applicants you receive from each method, where the successful applicants are coming from, and other similar assessments.

  • Analyze the results 

With your detailed cost per hire data, you can begin to compare and identify where your money is well spent and where you are wasteful in the recruiting process. Look for areas where your recruiting cost per hire is significantly higher and attempt to identify a cause for the lagging results.

  • Compare across departments

In addition to calculating cost per hire based on different recruiting tools and methods, you can also compare within the company. If you have multiple departments, compare cost per hire stats by the department. You can try to identify strong points from successful departments to apply to others and improve overall results.

  • Research industry standards

A useful benchmark for assessing your results is industry averages. While overall average costs in multi-industry studies have yielded results in the low $4,000’s, there will be variation across industries, and business sizes, so seek out data from similar businesses if possible.

  • Apply what you’ve learned

With all of your analysis complete, you can begin enacting changes based on the cost per hire results and what they say about your process. Adjust spending to focus on more-fruitful recruiting sources and trim costs where excess is.

Calculating cost per hire example

A company performs an end-of-year evaluation of its hiring practices in the prior calendar year. It spent a total of $6,500 on external spending for recruiting during the year, and an additional $9,500 on internal costs such as staff salary for hours spent on recruiting and lost productivity during the hires’ early weeks.

During this period, the company hired four new employees through the recruiting process. By dividing the total spending of $16,000 by the four employees hired, the company determines that the cost of onboarding a new hire in this period was $4,000.

When overseeing a company, there’s a lot to keep track of, and it can be all too easy to let the small details slip through the cracks. Calculating the cost of onboarding a new hire may seem like the kind of information you can afford to estimate, but once you begin closely tracking your recruiting costs, you’ll see the mistake in that line of thinking. 

Knowing your cost per hire allows you to identify inefficiencies and refine your process in ways that not only saves money in the immediate term by reducing recruiting costs but also by allowing you to switch focus to more-effective hiring methods

This, in turn, raises the quality of hire for your new employees, which is an even better way to improve your bottom line as it leads to an overall increase in company production. If you haven’t taken the time to find your cost per hire, quit missing out on this vital metric.

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