How to Calculate Cost Per Hire: A Step-by-Step Guide

What is Cost Per Hire?

The Cost Per Hire (CPH) is a key metric that evaluates the total expenses involved in recruitment, including advertising, recruiter salaries, and agency fees. By understanding how to calculate cost per hire, organizations can optimize hiring strategies and assess the efficiency of their recruitment efforts.

Definition and Overview

Cost per hire refers to the total internal and external expenses involved in recruiting and hiring a new employee. By wondering how do you calculate cost per hire? Businesses can allocate resources more strategically and streamline recruitment processes to reduce unnecessary expenses.

Why Cost Per Hire Matters in Recruitment

Budget Management

Understanding how you calculate cost per hire is crucial for effective budget management. It allows companies to identify overspending, such as high recruitment agency fees, and adjust strategies, like building an in-house team or using technology, to maximize their recruitment ROI.

Strategy Optimization

By learning to calculate cost per hire, companies can optimize recruitment strategies by identifying cost-effective hiring channels. For instance, if online job postings yield better candidates at lower costs, businesses can prioritize digital recruitment for greater efficiency.

Benchmarking Recruitment Performance

Benchmarking is essential when you calculate cost per hire, as it helps companies compare their metrics to industry standards. This process identifies improvement areas, enabling organizations to set realistic goals and drive continuous recruitment process optimization.

The Formula for Calculating Cost Per Hire

When asking how do you calculate cost per hire? Is vital to understand that it is used for optimizing recruitment processes. By dividing total internal and external recruitment costs by the number of hires, organizations gain insights into spending. This metric supports budget management, strategy optimization, and performance benchmarking.

Cost Per Hire Formula Explained

The formula for calculating cost per hire is expressed as:

Cost Per Hire = (Internal Recruiting Costs + External Recruiting Costs) / Total Number of Hires

This formula allows organizations to quantify the financial resources invested in acquiring new talent. By breaking down the components, companies can identify areas for cost reduction and process improvement.

Key Variables in the Formula

To accurately calculate the cost per hire, it’s essential to understand the key variables involved:

Internal Recruiting Costs

Internal costs encompass all expenses related to the recruitment process within the organization. This includes:

• Recruiter Salaries: Compensation paid to in-house recruiting staff.
• Employee Referral Bonuses: Incentives offered to current employees for referring successful candidates.
• Training Costs for Hiring Teams: Expenses related to training staff involved in the recruitment process.

External Recruiting Costs

External costs include all expenses incurred from outside the organization. These can be:

• Job Advertising Costs: Fees for posting job openings on various platforms.
• Recruitment Agency Fees: Payments made to agencies for their recruitment services.
• Travel Expenses for Candidates: Costs associated with candidate travel for interviews or assessments.

Total Number of Hires

Accurately calculating the total number of new hires is essential to maintain the integrity of the calculated cost-per-hire formula. This foundational tool helps HR managers and business leaders manage recruitment budgets and enhance hiring efficiency effectively.

How to Calculate Cost Per Hire in 5 Steps

Understanding how to calculate cost per hire is vital for optimizing recruitment strategies and managing budgets effectively. 

This metric highlights the financial resources used to attract and onboard employees, enabling companies to streamline hiring processes with greater accuracy and efficiency.

1. Define the Period 

To calculate cost per hire, start by defining the period:

• Set a time frame: Choose a month, quarter, or year based on your needs.
• Consistency: Ensure all costs and hires are accounted for within the same period.
• Consider trends: A quarterly review may highlight seasonal hiring patterns, while an annual analysis gives a broader efficiency overview.

Selecting the right time frame ensures data relevance and accuracy.

2. Identify and Sum Up Internal Costs

Internal costs are those incurred within the organization during the recruitment process. These can include:

Recruiter Salaries

Calculate the portion of recruiter salaries that corresponds to the time spent on hiring activities. This involves determining the percentage of their working hours dedicated to recruitment over the defined period.

Employee Referral Bonuses

If your company offers bonuses for employee referrals, these should be included in the internal costs. Track the total amount paid out in referral bonuses during the specified time frame.

Training Costs for Hiring Teams

Consider any training or development costs associated with improving the skills of your hiring team. This could include workshops, courses, or seminars aimed at enhancing recruitment capabilities.

3. Identify and Sum Up External Costs

External costs are those incurred outside the organization to attract and hire candidates. These can include:

Job Advertising Costs

Track expenses related to job postings on various platforms, including online job boards, social media, and industry-specific sites. Ensure all advertising costs are captured within the defined period.

Recruitment Agency Fees

If your organization utilizes recruitment agencies, include the fees paid to these agencies for their services. This could be a flat fee or a percentage of the hired employee’s salary.

Travel Expenses for Candidates

For positions requiring in-person interviews, account for any travel expenses reimbursed to candidates. This includes transportation, accommodation, and meals.

4. Count the Total Number of Hires​​

To calculate cost per hire, total internal and external recruitment costs are divided by the number of new hires who started their roles within the specified period. This ensures an accurate analysis of recruitment expenses per successful hire.

5. Apply the Cost Per Hire Formula

With all the necessary data in hand, you can now apply the cost-per-hire formula:

Cost Per Hire = (Total Internal Costs + Total External Costs) / Total Number of Hires

This formula will give you a clear understanding of the average cost incurred to hire each new employee. By regularly calculating and analyzing this metric, you can identify trends, optimize recruitment strategies, and make informed budgetary decisions.

Examples of Cost Per Hire Calculation

Understanding how to calculate cost per hire is crucial for organizations aiming to optimize their recruitment processes. This section will delve into real-world examples from various industries and provide a detailed guide on using Excel for these calculations.

Real-World Examples Across Industries

Different industries have unique recruitment challenges, which influence their cost per hire. Let’s explore some examples:

• Technology Sector: In tech companies, the cost per hire often includes significant expenses on recruitment software and job board postings. For instance, a mid-sized tech company might spend $10,000 per hire, factoring in recruiter salaries, software subscriptions, and candidate relocation costs.
• Healthcare Industry: Hospitals and clinics typically face higher costs due to the need for specialized skills and certifications. A hospital might report a cost per hire of $15,000, including expenses for background checks, credential verification, and extensive interview processes.
• Retail Sector: Retail companies, on the other hand, often have lower costs per hire, around $3,000, as they rely heavily on internal referrals and local job fairs to fill positions quickly and cost-effectively.

These examples illustrate how industry-specific factors can significantly impact the cost per hire, emphasizing the need for tailored strategies in recruitment planning.

How to Calculate Cost Per Hire in Excel

Excel is a powerful tool for calculating cost per hire, offering flexibility and precision. Here’s a step-by-step guide to help you get started:

Step-by-Step Instructions

To calculate cost per hire in Excel, follow these steps:

• Set Up Your Spreadsheet: Create columns for each cost category, such as internal recruiting costs, external recruiting costs, and total number of hires.
• Input Data: Enter the relevant data for each category. For example, list recruiter salaries under internal costs and job board fees under external costs.
• Use Formulas: Utilize Excel formulas to sum up the costs. For instance, use =SUM(A2:A10) to calculate the total internal costs.
• Calculate Cost Per Hire: Divide the total costs by the number of hires using the formula =TotalCosts/TotalHires to determine the cost per hire.

Using Built-In Formulas

Excel’s built-in formulas can further simplify the process:

• AVERAGE: Use the =AVERAGE() function to find the average cost per hire over multiple periods.
• IF Statements: Implement =IF() statements to handle conditional calculations, such as excluding costs that exceed a certain threshold.

By leveraging Excel’s capabilities, HR managers can efficiently manage and analyze recruitment expenses, paving the way for more informed decision-making.

What is a Good Cost Per Hire?

Understanding a good calculated cost-per-hire metric is vital for optimizing recruitment strategies. This figure reflects hiring efficiency and varies by industry, company size, and location. Benchmarking against these factors helps gauge and improve recruitment effectiveness.

Industry Benchmarks and Standards

According to SHRM, the average calculated cost per hire in the U.S. is $4,129, with higher costs in specialized industries like tech and healthcare. While benchmarks provide guidance, companies should tailor evaluations to their unique goals, using comparisons to pinpoint areas for improvement and refine budgets.

Factors That Influence Cost Per Hire

Several factors can influence the cost per hire, making it essential for companies to analyze these variables to manage their recruitment expenses effectively.

Company Size

Larger companies often benefit from economies of scale, which can reduce the cost per hire. They may have dedicated recruitment teams and streamlined processes that smaller companies lack. Conversely, smaller companies might face higher costs due to limited resources and the need to outsource certain recruitment functions.

Recruitment Channels

Recruitment channels greatly influence the calculated cost-per-hire metric. Digital methods like social media and job boards are often more cost-effective than traditional options like agencies or job fairs. Analyzing channel effectiveness helps allocate budgets efficiently and minimize costs.

Location and Industry

Geographical location and industry type significantly affect how you calculate cost per hire. High-cost regions and competitive industries drive up recruitment expenses. Tailoring strategies to these factors helps businesses optimize hiring processes, use cost-effective channels, and attract top talent efficiently.

How to Optimize and Reduce Cost Per Hire

In today’s competitive job market, businesses must optimize how they calculate cost per hire to balance budgets while attracting top talent. 

Leveraging technology and strategic adjustments can reduce hiring expenses without compromising hire quality. Let’s explore strategies to enhance recruitment efficiency.

Examine Hiring Sources and Channels

To reduce cost per hire, evaluate the effectiveness of your current recruitment channels:

• Analyze past data: Identify which channels offer the best return on investment.
• Leverage referrals: Employee referrals often lead to faster and cheaper hires.
• Use social media: Platforms and professional networks expand your reach at a low cost.

Focusing on cost-effective channels can significantly lower hiring expenses.

Invest in Technology for Recruitment

Technology is key to optimizing how you calculate cost per hire. Tools like Applicant Tracking Systems (ATS) and AI-driven candidate matching streamline hiring, saving time and resources while improving efficiency. This approach minimizes costly hiring mistakes and enhances the candidate experience, attracting top talent.

Focus on Employee Retention

Reducing turnover helps lower cost per hire:

• Improve retention: Foster a positive work environment and offer competitive benefits.
• Provide career development: Regular feedback and growth opportunities boost employee satisfaction.
• Engaged employees stay longer: Reducing turnover minimizes the need for frequent recruitment.

This approach can significantly cut hiring costs by retaining talent longer.

Regularly Review Recruitment Metrics

Regularly reviewing recruitment metrics like time to fill, quality of hire, and source of hire is essential to calculate cost per hire effectively. Quarterly analysis helps identify areas for improvement, enabling data-driven adjustments to optimize strategies, reduce costs, and maintain competitiveness in attracting top talent

Frequently Asked Questions About Cost Per Hire