Cost per hire (CPH) is a recruiting metric that measures the financial investment a company makes to fill a vacant position. It includes all the expenses involved in attracting, recruiting, and onboarding a new employee. This key metric allows companies to assess the efficiency and effectiveness of their hiring efforts.
Formula for Cost Per Hire
The basic formula for calculating cost per hire is:
Breaking Down the Costs
- Internal Recruiting Costs: These include in-house expenses like salaries for HR staff, recruiter time, administrative support, and employee referral bonuses.
- External Recruiting Costs: This category includes external spending such as:
- Job board fees
- Advertising costs
- Recruitment agency fees
- Travel expenses for interviews
- Background checks and assessments
- Technology tools (like Applicant Tracking Systems or ATS)
- Employer of Record (EOR) fees for outsourced employment and onboarding support
By tracking both internal and external costs, organizations can better manage their budgets and identify inefficiencies.
Why is Cost Per Hire Important?
Understanding cost per hire is critical for several reasons:
- Budgeting and Forecasting: Tracking CPH helps businesses allocate their recruitment budget more effectively and anticipate future hiring costs.
- Evaluating Recruitment Strategies: Analyzing cost per hire data allows companies to assess the performance of their hiring methods. For example, is it more cost-effective to hire through an external agency or an internal team?
- Justifying HR Spend: By calculating CPH, HR departments can show executives the financial impact of recruitment and advocate for more resources if necessary.
- Improving Efficiency: Knowing where the bulk of your recruiting costs lie can help optimize spending. For instance, if job board fees are driving up costs, HR may focus on building a talent pipeline or utilizing employee referrals.
How to Track Cost Per Hire
Tracking cost per hire requires attention to detail and a clear process. Here’s how you can efficiently calculate and monitor this metric:
1. Centralize Your Data
Ensure that all recruitment-related expenses are documented and easily accessible. Use digital tools like HR management software or expense tracking systems to track costs accurately. An Applicant Tracking System (ATS) or a payroll provider can also help aggregate cost data across multiple hires.
2. Identify All Recruiting Costs
To avoid underestimating your CPH, it’s crucial to identify both visible and hidden costs:
- Visible costs: Job postings, recruiter salaries, agency fees.
- Hidden costs: Interviewer time, relocation expenses, and administrative fees.
Be sure to account for every expense tied to filling a position, including time invested by your internal team.
3. Leverage Technology and Automation
Technology plays a critical role in tracking recruitment costs. For example, EOR platforms like FoxHire’s can simplify the onboarding process, reducing internal time and effort. With automated workflows, companies can track onboarding costs and compare the expenses of using an EOR vs. in-house processing.
4. Monitor and Analyze Trends
Once you’ve calculated your CPH, analyze trends over time. Are your costs rising or decreasing? Do certain roles have significantly higher hiring costs than others? Monitoring these trends can help improve your recruitment strategies.
5. Benchmark Your Results
Compare your cost per hire to industry standards or competitors. This can help gauge whether your recruitment process is more or less expensive than the norm. Large organizations and those with high-volume hiring may have lower CPH due to economies of scale, whereas specialized roles may drive higher costs.
How to Reduce Cost Per Hire
If your cost per hire is higher than expected, here are some strategies to lower it:
- Optimize Job Advertising: Use data-driven recruitment marketing to target job ads more effectively, reducing unnecessary spend.
- Enhance Employer Branding: A strong employer brand attracts top talent organically, cutting down on recruitment marketing and advertising costs.
- Improve Retention: Hiring for the same position repeatedly can inflate CPH. Focus on retention strategies to reduce turnover and recurring hiring costs.
- Partner with an Employer of Record (EOR): By outsourcing employment processes to an EOR provider like FoxHire, companies can streamline compliance, payroll, and benefits administration, ultimately reducing internal HR costs.
Conclusion
Tracking cost per hire is essential for any organization looking to improve its recruiting efficiency. By understanding the total financial investment required to bring new employees on board, HR teams can optimize their hiring strategies and identify ways to reduce costs. With the right technology, careful expense tracking, and constant evaluation, businesses can better manage their recruitment budget and maximize their return on investment.
Whether you’re a staffing agency or an internal HR department, monitoring your cost per hire can lead to smarter, more cost-effective hiring decisions.
