Cost per Hire Explained: What It Is, Pros and Cons

As the economic recession continues to loom over Britain, wise money is on keeping tabs on the cost of hiring new personnel. Cost per hire is a recruiting metric that can massively improve your HR efficiency and payroll management, to help you get better value for money when hiring new employees.

Considering that the post-pandemic job market is still marked by professionals keen on switching jobs, chances are that you’re either hiring right now or needing to in the near future. That’s when a low cost per hire comes in handy.

In this article, we’ll cover how you can calculate it and give you examples of costs that should be factored into your sums.

We’ll also touch on cost per hire’s shortcomings. For all its insights, it’s not an all-encompassing statistic and shouldn’t be the only one you use to measure your hiring success. That said, it’s a great place to start so, if you’d like to know more, read on!

What does cost per hire mean?

Cost per hire is the average amount you spend to secure a new employee over a set time period. It includes both internal and external costs, while the period can be set according to your company’s needs. As an internal metric, it benefits from being periodically analysed so the recruiting process can be assessed and improved.

How do you calculate cost per hire?

Cost per hire can be calculated by adding both the internal and external costs of hiring a new employee, and then dividing the result by the number of employees you hired during the time period you’re analysing.

We’ll look at some examples of what would make up each of those. Though the lists below are non-exhaustive, they can give you an idea of what to factor in when calculating your cost per hire.

Internal recruiting costs

Internal recruiting costs come down to the expense you incur within your own quarters.

• Hiring team

If you have a hiring team, then their salary and any additional pay is your primary internal recruiting cost.

• Interview costs

If you have people from outside of the human resources (HR) department conducting or attending interviews, you should factor the cost of their time spent doing this by looking at their hourly rate.

• Training and development

A hiring team that’s not up to date with the market is unlikely to make a splash when it comes to securing new employees, so training is a must – and it’s also a must include here.

• Compliance

Overseeing all the documentation involved in hiring – and making sure everything looks kosher – incurs costs and this should be taken into account.

• Referral program

Referral programs can be an excellent way to get your employees to recommend trusted people for roles within your companies, but they also normally incur a prize that needs to be taken into account as a cost.

• Supplies

This is a tough one to quantify. If you’d like to get to the nitty gritty of your hiring process, include the price of the tools your hiring team needs to do their job. Think energy and stationery used, as well as the rented space, for instance. If a precise figure can’t be obtained, then a fraction of the budget of your HR team can be used instead.

External recruiting costs

External recruiting costs amount to what you pay to external providers, whose activity forms part of your hiring process.

• Job board posting

If you recruit via job boards, the cost of running an advert will feature here.

• External agency

The same thing applies if you use recruitment agencies – just add the costs up.

• Job fairs

If your company participates in job fairs, the amount spent for this should also be factored in.

• Assessment costs

Anything that needs to be spent for your candidates to meet the initial requirements before the interview process will fall into this category.

• Background checks

You also need to shell out to check a candidate’s record, which is usually undertaken by a third party.

• Relocation costs

If you’re recruiting talent from another city or country, any contribution you make to their relocation goes here.

Total number of hires

For the metric to be obtained, you should divide the costs you just added up by the number of hires you made in a particular time period.

Why should you calculate cost per hire?

If measured correctly, cost per hire allows you to budget for your recruitment process with remarkable precision, while also helping you to stick to that budget.

Over time, you’ll be able to spend more efficiently, removing any unnecessary expenditure from the process. For example, if participating in job fairs had a steep price tag but didn’t yield substantial results, this could be reduced or axed. It can also help measure the amount of in-house and outsourced recruitment your company can benefit from most.

How can you use cost per hire effectively?

Once you obtain your cost per hire, you’ll be able to kickstart some processes in your company that will help amp up efficiency. These include:

Fine-tune your recruitment process

Cost per hire will give you a bird’s-eye view of every step of your recruitment process (along with the price tags). This gives you an opportunity to question some of these steps and improve the process.

Benchmark your cost per hire

With your cost per hire in hand, you can compare it with the overall market average and see if you’re spending too much. This is unlikely to be precise (as this is not usually a metric publicised by companies), but the idea is to gauge where you stand among your competitors in a broad sense. We note that, when benchmarking, you’ll need to break down your cost per hire per department or position type.

Analyse your recruiters’ performance

Your cost per hire also gives you an insight into your in-house recruitment team’s performance (if you have one). If the metric is too high because of a low number of hires, it’s worth assessing the department’s workflow and finding ways to improve it.

What does cost per hire fail to address?

At a glance, cost per hire is an alluring metric as it can put you on a quest to lower the amount you spend for each new employee.

However, cost per hire can’t be the only metric you use to measure your recruitment success. For all the insight it gives, it isn’t an all-encompassing measurement, as important factors aren’t taken into account by the formula. Some of these include:

Role seniority

Hiring senior roles generally involves more involvement and resource deployment. This is because their selection process is usually longer. On the cost per hire formula, this will only show up as a hire that costs more and its importance won’t be highlighted.

Hire quality

Cost per hire does factor in new employees, but it doesn’t factor in those who leave the company. It doesn’t shed any light on the quality of the hires. Therefore, while you may rejoice that your cost per hire may be low, the formula doesn’t tell you how many of these are staying.

If you want to improve the quality of your candidate pool, consider salary transparency in your job adverts.

Market scarcity

Market scarcity can oscillate your cost per hire metrics without being acknowledged by the formula, which can give you incomplete data. If you’re hiring for a role that has insufficient applicants at any given time, this process is bound to take longer and cost more. This won’t show up in a clear manner in the formula.

Cost per hire: what are the final takeaways?

Cost per hire is an excellent metric for you to assess how much you’re spending on new hires and budget efficiently for this process. You can obtain it by adding both the internal and external costs of hiring a new employee, and then dividing the result by the number of employees you hired during the time period you’re analysing.

However, cost per hire is just one piece in the puzzle of your recruitment process and, albeit important, shouldn’t be the only metric used to establish your efficiency in this area. This is because it fails to address the state of the market and hire quality, among other important factors.

For these reasons, using cost per hire just as a means to get cheaper hires isn’t the best application of the metric. Sure, reducing costs is always high on any business owner’s to-do list but, as far as recruitment goes, employees whose profiles match your company’s needs are likely to provide better return on investment in the long run. These staff members should be viewed as assets – even if you have to shell out more to hire them.