The cost of onboarding a new hire can become expensive, and if you've never analyzed or even estimated how much your company is spending on adding an employee to your team, you may be surprised.
When you dissect your decisions and spending metrics in the hiring process, you can create a cost of new hire estimate that helps you to make informed, smart decisions in the future. These choices result in improved efficiency and more-accurate budgetary preparation. These benefits then allow you to increase the company’s productivity and help to improve your bottom line.
In this article, you'll learn what cost per hire is, why it is essential to your business, how it's calculated, and a cost per hire example to demonstrate.
Cost per hire definition
The definition of ‘cost per hire’ is exactly what you’d think. Cost per hire means 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 the time to break down the work and resources needed to post a job, assess applicants, and, finally, onboard the recipient of the position.
It's important to avoid overlooking any potential costs when performing your calculation. Missed figures can result in missing out on the potential to improve in those areas, and you’ll end up with an inaccurate estimate of your cost per hire.
What are recruiting costs?
There are many recruiting costs to include and monitor when calculating your cost per hire, and, unfortunately, not all of them come in the form of direct spending that appears on the balance sheet. That would be all too easy!
A standard method of approaching recruiting cost calculation is to break your costs into two groups, internal and external costs.
But what are internal and external costs in recruitment? What are some examples of internal and external costs? Unfortunately, it can become all too easy to feel overwhelmed and brush calculating recruitment costs to the side. But this will cost your company money and time in the long run.
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
Internal recruiting costs 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 simple to perform your calculations.
To calculate your cost per hire:
- Add up both your external costs and internal costs on all new hires in a given period.
- Then, divide the resulting number by the total number of hires in that same period.
- You’re left with 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 is important to know to reduce your overall spending and to refine the areas where you are spending your resources.
One practical use of cost per hire is calculating 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. You’re then in a position where you can 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, you can use cost per hire calculations to 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 data you can gather on cost per hire, the more avenues it will open for you. This means finding your overall costs and itemizing your costs based on the different areas of spending. This information can be combined with additional metrics such as 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 contrast, identifying where money is well spent and where you are wasteful in the recruiting process. Dig into areas where your recruiting cost per hire is significantly higher and explore any potential causes 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 the metric internally. If you have multiple departments, compare cost per hire stats by department. You can identify strong points from successful departments and then apply these strategies to others and improve the company’s 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. You can compare the data between competitors, and research their hiring process to implement their strategies should you be inspired.
- 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.
Cost per hire formula
So, how exactly do you calculate the cost per hire? What is the formula to discover your cost per hire? Follow the steps:
- Calculate your internal costs
- Calculate your external costs
- Add them together
- Divide this figure by the number of hires
In summary, the cost per hire formula is:
[Total internal costs] + [Total external costs] / [The number of hires]
Cost per hire - other metrics
As we jump into the world of cost per hire, you can identify two other subcategories to enhance your recruitment process, reduce the overall cost per hire, and raise the overall quality of hire. Here are the key metrics relating to cost per hire:
Cost per hire comparable (CPHC)
This cost per hire falls under the same method as the standard CPH, but the cost per hire comparable (CPHC) uses different data. The comparable breed of cost per hire focuses on every fairly common cost across companies. So, for example, it may exclude the cost of travel expenses but include job listing fees if the company (and their competitors) were online businesses and required working from home.
Recruiting Cost Rate / Recruiting Cost Ratio
This formula calculates the cost of acquiring new talent. In short, the recruiting cost rate/ratio (RCR) calculates how much money a company is spending on all the elements needed to find, attract, and hire new employees.
The formula to discover your recruiting cost rate is:
Your external costs + Your internal costs / The total compensation of new hires * 100
Example of calculating cost per hire
Sometimes, it’s tricky to understand a calculation and see the impact unless you have a solid example to learn from. So here’s an example of calculating cost per hire with that in mind.
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.
There's a lot to keep track of when overseeing a company, 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 save money in the immediate term by reducing recruiting costs but also by switching your focus to more effective hiring methods.
This, in turn, raises the quality of hire for your new employees. An increased quality of hire is an even better way to improve your bottom line because it leads to an overall increase in company production. So if you haven't taken the time to find your cost per hire, quit missing out on this vital metric.
Cost per hire by industry
The Society of Human Resource Management has recently discovered that the average cost per hire is slightly over $4000. However, this figure can be much higher or much lower depending on the size of your company and the industry it falls under.
Different roles and various industries can impact your average cost to hire because the roles may take longer to fill (which affects your time-to-hire rate). For example, an engineering role may take longer to fill and require more sourcing. This will increase your overall cost per hire.
It’s clear that the cost per hire will rise and fall from the average, depending on the industry and role you’re trying to recruit for. For this reason, the average should be taken with a pinch of salt. If yours is far higher or lower, there’s likely a good reason for this.
Cost per hire statistics in 2022
We’ve got the latest data to share about cost-to-hire rates. Remember, these statistics shouldn’t be interpreted as ‘right or wrong.’ This rate isn’t as black and white as that. However, it’s a good benchmark. So, here are cost per hire statistics in 2022:
- The average cost per hire is exactly £4425.
- In the United States, it takes between 36 and 42 days to fill the average role.
- Human Resources use 15% of their expenses on recruitment on average.
- Generally, it costs 40% of an employee’s base salary to hire one new employee, including benefits.
- On average, it takes around 12 weeks for a new employee to become settled and show total productivity levels at work.
- In the United States, the median cost per hire is $1633. This shows that some roles require a lot more money to fill than others.
- Small businesses and companies that have between 100 - 999 employees spend, on average, more than $1000 on each employee for training every year. That’s a staggering $658 more than larger businesses.
Cost per hire - is it worth all the effort?
Crunching numbers and analyzing data can be a company’s worst nightmare. Being presented with figures that are too high or too low often prevents an organization from keeping track. The truth is, knowing your cost-per-hire allows you so much more than access to data.
When put together as a story by spotting patterns, the numbers can represent areas of strength and weakness in your recruitment process.
So, when you ask, ‘is calculating the cost per hire worth the effort and time?’, our answer is always, fundamentally yes.
