How to Calculate Cost Per Hire: A Simplified Guide
Understanding the cost per hire is essential for effective recruitment budgeting and decision-making. In this blog post, we’ll provide a simplified approach on how to calculate the cost per hire, breaking it down into easy-to-follow steps.
Table of Contents
Steps to calculate cost per hire:
To measure the cost per hire, you can follow these steps:
- Identify cost categories: Determine the different cost categories associated with the hiring process. These may include recruitment advertising, job board fees, recruitment agency fees, background checks, candidate travel expenses, employee referral bonuses, recruitment software expenses, and HR staff salaries.
2. Calculate direct costs: Calculate the direct costs by adding up all the expenses incurred directly in the hiring process. This includes the costs mentioned in the previous step. Be sure to include any costs associated with each individual hire.
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3. Determine indirect costs: Consider indirect costs that are not directly tied to a specific hire but are still part of the overall hiring process. Indirect costs can include HR staff salaries, benefits, office space, technology, and administrative overhead. Allocate a portion of these costs to the hiring process based on a reasonable estimate or percentage.
4. Calculate total costs: Add up the direct costs and the allocated portion of indirect costs to get the total costs incurred in the hiring process within a given period.
5. Count the number of hires: Determine the total number of hires made within the same period for which you calculated the total costs.
6. Divide total costs by the number of hires: Divide the total costs by the number of hires to calculate the cost per hire. This will give you an average cost incurred for each individual hired during that specific period.
7. Analyze and compare: Analyze the cost per hire over time or compare it with industry benchmarks to evaluate its effectiveness and efficiency. This analysis can help identify areas where costs can be reduced or optimized.
Example
Let's illustrate this with a hypothetical scenario. Suppose an organization spent $10,000 on recruitment efforts in a given quarter and hired 5 employees during that period. Cost per Hire = $10,000 / 5 = $2,000 In this example, the cost per hire would be $2,000.
Questions You Should Ask to Optimise Hiring Costs
- How does cost per hire vary across different job levels and positions?
- What are the main cost drivers that contribute to your high cost per hire?
- How does cost per hire vary across different recruitment channels (e.g., job boards, social media, referrals)?
- Have you considered the impact of a lengthy recruitment process on cost per hire?
- What is the correlation between cost per hire and quality of hires?
- How does cost per hire differ between internal hires and external hires?
- What is the average cost per hire for specialized or hard-to-fill roles?
- How does cost per hire compare between different geographical locations within a country where your offices are located?
- What is the trend of cost per hire over time and how does it impact the overall recruitment budget?
Frequently Asked Questions
What is a good cost per hire benchmark?
A good cost per hire benchmark varies by industry and position but can range from $4,000 to $10,000. In India, in India it can range from INR 50,000 to INR 2,00,000, depending on the industry and position.
How can I reduce my cost per hire?
To reduce cost per hire, focus on optimizing recruitment channels, streamlining the hiring process, leveraging employee referrals, and investing in employer branding.
What factors contribute to high cost per hire?
Factors contributing to high cost per hire include high competition for talent, extensive sourcing efforts, lengthy hiring processes, high turnover rates, and reliance on external recruitment agencies.
How does cost per hire vary across different industries?
Cost per hire can vary significantly across industries due to differences in talent scarcity, competition, recruitment strategies, and due to variations in talent demand and supply dynamics.
What is the average cost per hire for executive-level positions?
The average cost per hire for executive-level positions tends to be higher than for other roles, due to specialized search processes and higher salary expectations. It is often a function of the salary of the positions filled and ranges upwards of 20% in many cases.
Should I include external recruiting agency fees in the cost per hire calculation?
Yes, external recruiting agency fees should be included in the cost per hire calculation as they contribute directly to the overall cost.
What is the impact of a longer time-to-fill on cost per hire?
Longer time-to-fill increases cost per hire by prolonging vacancy costs, increasing sourcing efforts, and potentially losing qualified candidates to competitors.
What are some cost-effective recruitment strategies to lower the cost per hire?
Cost-effective recruitment strategies include optimizing career websites, leveraging job portals with a wide reach, building talent pipelines through networking, utilizing employee referrals, and conducting virtual hiring events.
What are the hidden costs that should be considered when calculating the cost per hire?
Hidden costs to consider when calculating cost per hire include travel expenses for candidates, relocation assistance, background verification, drug testing, recruitment marketing, and campus recruitment expenses.