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Why Calculate Cost Per Hire?

Why Calculate Cost Per Hire?

Every company needs to know their cost of turnover for each key position.  Cost-per-hire tells you what it will cost to replace someone who quits or was terminated.  Tracking costs is something most companies are doing anyway.  Giving extra attention to small or hidden expenses in your recruiting and hiring process will display the total value of the talent replacement functions.  Don’t let high cost-per-hire numbers scare you. It could indicate that your recruitment process is more tailored, efficient and effective. Whether your company uses traditional hiring methods or newer, more innovative strategies, knowing how to calculate cost-per-hire is essential to managing costs and quality of hire.

Companies are always interested in reducing their cost-per-hire. However, finding the right balance in your cost-per-hire is not that simple. You don’t want to lower the cost-per-hire to the point, where you overlook the quality of a hire. Top performing talent can be more expensive to recruit and they may take longer to acquire, but their productivity can often be two or three times that of an average performer.

How do you know if your cost-per-hire is high, low, or average?

Start by comparing your costs against available benchmarks.

  • $4129: according to SHRM
  • $4000: according to Bersin
  • $3400: cost for an entry-level employee
  • 16% of annual salary: cost for a 30K or less job
  • 20% of annual salary: cost for a 75K or more job

To better understand and compare cost-per-hire at your company, you can calculate specific costs by position and/or department.  The cost-per-hire for roles in software development may be higher than in sales due to the higher demand for developers compared to sales professionals.  Breaking down your cost-per-hire is an important strategic tool to evaluate your recruiting process and to identify areas for improvement.  It will also help guide your recruitment budget.  Even though it may be time consuming, developing good numbers to accurately assess cost-per-hire will benefit everyone involved in talent acquisition. Good metrics will help you reduce costs while improving the efficiency and effectiveness of your recruitment process.

Here are some line items to consider in your cost-per-hire calculations:

Internal recruiting costs

  • Recruiter salaries, Hiring Manager salaries
  • Employee referral bonuses
  • Interview costs (# of hours X hourly salary of interviewer or hiring manager)
  • Technologies (e.g. Applicant Tracking Systems)
  • Background checks
  • Drug Tests
  • Pre-hire Assessments
  • Signing bonuses
  • Average annual salary of new hires
  • Offer acceptance rates
  • Time-to-fill
  • Time-to-start
  • Training Costs
  • Time-to-reach-peak-productivity

External recruiting costs

  • Staffing agency costs
  • External recruiter costs
  • Job posting boards and career fairs
  • Advertising/Marketing costs
  • Candidate travel, lodging and meals
  • Candidate relocation costs

 

Formula

SHRM’s formula for cost per hire is the sum of all recruiting costs divided by the number of hires in a specific time period.

  • (Total internal recruiting costs + Total external recruiting costs) / (Total # of hires)

 

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