Tracking hiring costs is crucial, yet many organizations struggle to calculate and optimize their cost per hire (CPH).
In this post, you’ll get a clear overview of CPH, including an easy-to-use formula, industry benchmarks, and tips to improve efficiency.
Let’s begin!
Introduction to Cost Per Hire
Calculating cost per hire is an important metric for companies to understand when making hiring decisions.
It helps benchmark recruiting success, set realistic hiring budgets, and optimize the overall hiring process.
Understanding CPH
CPH refers to the average total costs involved with filling an open position. This includes expenses like:
- Recruiter fees
- Job advertising
- HR staff time spent screening and interviewing candidates
- Background checks
- Offer letters and onboarding
To calculate it, add up these recruiting and hiring costs over a set time frame, then divide by the number of hires made in that period.
Why is CPH Important?
Tracking cost per hire over time provides key insights, such as:
- Benchmarking: Compare your CPH to industry averages to gauge recruiting efficiency. A lower cPH suggests an optimized hiring process.
- Budgeting: Forecast hiring budgets more accurately based on historical spending data per hire.
- Optimization: Identify ways to streamline processes if your CPH rises over time. This could involve better candidate screening or more targeted job ads to reduce time-to-fill open roles.
Monitoring cost per hire ensures your hiring funnel remains lean, efficient, and aligned to business goals over time.
Why is it important to know cost per hire?
Understanding your CPH is crucial for making strategic recruiting and hiring decisions.
Here are some of the key reasons why its an important metric:
- Budgeting and forecasting: Knowing your average CPH allows you to more accurately budget for recruiting and staffing costs as your company grows. You can forecast how hiring additional headcount will impact your bottom line.
- Measuring recruiting efficiency: Tracking CPH over time shows whether your recruiting efforts are becoming more or less efficient. If costs are increasing, it may signal issues in the hiring process that need to be addressed.
- Prioritizing investments: Comparing CPH for different types of roles can reveal which positions are most resource-intensive to fill. This allows you to prioritize investments in sourcing, compensation, or other incentives where they are likely to have the greatest impact.
- Benchmarking: Understanding industry averages for CPH gives useful context for evaluating your own recruiting spend. Significantly exceeding benchmarks could indicate inefficiencies to focus on.
In summary, CPH metrics shine a light on the true costs of recruiting and where process improvements may be needed.
They are indispensable numbers for making strategic resourcing decisions.
Tracking this KPI over time provides insight into the efficiency of hiring processes.
What is the CPH hire formula for SHRM?
SHRM’s formula for calculating cost per hire is:
CPH = Total recruiting costs / Number of hires
Where:
- Total recruiting costs: This includes expenses like job board postings, agency fees, employee referral bonuses, travel costs for interviews, etc.
- Number of hires: The number of people hired over a specific period of time, such as a month or year.
Some key things to note about SHRM’s cost per hire formula:
- It calculates the average CPH over a period of time by dividing total costs by number of hires. Individual hires may cost more or less.
- It encompasses all recruiting-related costs – not just the recruiter’s salary. Things like job advertising and travel expenses need to be factored in.
- More hires over a period reduces the average CPH. But increased hiring volume likely increases total recruiting spend.
- The formula can be calculated monthly, quarterly, or annually depending on the hiring volume and time horizon desired.
Calculating cost per hire this way provides recruiters and hiring managers important data to benchmark and optimize their hiring spend. While there may not be a universal “good” cost per hire, understanding your organization’s costs is vital.
Is CPH a measure of applicant quality?
Cost per hire (CPH) can provide insights into applicant quality, but it is not a direct measure.
Here are a few key points:
- CPH calculates the average cost to fill a position. This includes expenses like job board postings, agency fees, employee referral bonuses, travel costs for interviews, etc.
- A high CPH could indicate the position is challenging to fill. Reasons may include specialized skills needed, low applicant volume or quality, inefficient recruiting process, unattractive employer brand, etc.
- However, CPH does not directly assess applicant quality. Additional metrics are needed for that, like source of hire, time to fill, offer acceptance rate, new hire performance scores, retention rate after 1 year, etc.
So in summary, CPH offers useful hiring process benchmarking but does not quantify applicant quality. It instead points to potential applicant pipeline issues worth investigating further.
Tighter integration of CPH analysis with downstream hiring metrics provides a more complete picture.
CPH Example and Benchmarks
Comparing your cost per hire to industry benchmarks is crucial for evaluating recruiting effectiveness.
This section provides data-driven cost per hire ranges across different industries.
Average CPH by Industry
- Technology – $4,000-$5,000
- Finance – $3,500-$4,500
- Healthcare – $2,000-$3,000
- Retail – $1,500-$2,500
Cost per hire varies widely by industry depending on factors like role complexity, competition for talent, etc.
Average CPH 2023
The average cost per hire in 2023 is projected to be around $4,000 across all industries. This marks a slight increase from 2022 as the tight labor market persists.
What is a Good CPH
A good cost per hire depends on your industry but generally:
- Excellent: Below industry average
- Good: Aligns with industry average
- Needs Improvement: 20-30% above industry average
For example, $3,000 would be an excellent cost per hire in healthcare, while that figure would indicate room for improvement in technology.
Factors Affecting CPH
Several key factors impact average cost per hire:
- Seniority Level – More senior roles have higher costs per hire
- Local Talent Pool – Smaller talent pools increase competition and costs
- Company Size – Bigger companies can leverage economies of scale
- Employer Brand – Strong brands attract more applicants at lower costs
Tracking cost per hire metrics over time can reveal recruiting process improvements or worsening talent market dynamics.
Strategies for Optimizing CPH
Reducing Time-to-Fill to Lower Costs
Reducing the time it takes to fill open positions can significantly lower an organization’s overall recruiting costs.
The longer a role stays vacant, the more money is spent on job board postings, recruiter hours, and lost productivity.
Here are some tips for speeding up time-to-fill:
- Streamline screening processes to identify qualified candidates faster
- Provide clear job descriptions so applicants understand the role and requirements
- Set up an applicant tracking system to organize and track candidates efficiently
- Offer fast and convenient interview options like video conferencing
- Make hiring decisions quickly after final round interviews
By reducing time-to-fill by even a few days per hire, an organization can save thousands in recruiting costs over time.
Leveraging Automation in Recruiting
Automation tools powered by AI can greatly improve efficiency in recruiting workflows.
Features like automated resume screening, candidate matching, and scheduling can reduce manual reviewing and administrative tasks.
Key benefits of automating parts of the recruiting process include:
- Faster screening and shortlisting of applicants
- More time for recruiters to focus on higher value tasks
- Lower cost per hire by reducing recruiter hours per new hire
- Improved candidate experience through fast responses and scheduling
Rethinking Candidate Sources for Efficiency
The sources that candidates are recruited from can have a direct impact on cost per hire.
Channels like employee referrals and talent networks tend to provide quality hires faster and at a lower cost than alternatives like staffing agencies.
Some tips for sourcing candidates efficiently:
- Survey employees for referrals before posting jobs elsewhere
- Build a talent pool database for critical roles
- Leverage social networks like LinkedIn to source passive candidates
- Partner with local schools and training programs for entry-level roles
- Offer employee referral bonuses to incentivize high-quality applicants
Rethinking the candidate pipeline with a focus on faster, cheaper sources allows organizations to scale recruiting more efficiently.
Conclusion: The Impact of Cost Per Hire on Business
Calculating and tracking cost per hire is crucial for organizations to optimize their recruiting efforts and boost their bottom line.
Here are some of the key reasons why:
- Reduces Overall Recruiting Costs: By calculating CPH, companies can identify inefficiencies in their hiring process and take steps to streamline it. This leads to a lower average CPH over time.
- Enables Data-Driven Hiring Decisions: With accurate cost CPH metrics, recruiters can determine the most cost-effective sources of hire and allocate budget and resources accordingly. This allows for smarter, optimized hiring strategies.
- Identifies Issues in Candidate Experience: A high CPH could indicate problems in the application and interview process leading candidates to drop out. Fixing these issues improves candidate experience.
- Supports Accurate Budgeting: Understanding historical spending per hire allows organizations to better forecast and manage their recruiting budget each year. A lower CPH means being able to hire more talent within budget.
In summary, regularly calculating cost per hire and taking action to optimize it has tangible benefits for an organization’s productivity, growth, and bottom line.
The efficiency and return on investment of the recruitment process impacts everything from company culture to business performance.
