How to Calculate Cost-Per-Hire and Why the Recruiting Metric Matters
Learn four things to make the most of average cost per hire as a recruiting KPI
There’s not a lot that is left to chance in our data-driven business world today. It seems we’re being asked to track, measure and analyze almost everything we do, in an effort to prove our value – and our impact on the bottom line. Businesses use this data to determine how to allocate future resources and budget. So, it’s important to develop key performance indicators (KPIs) that tell the full story of whether or not a function has what they need to be successful.
What is cost per hire?
Cost per hire is a recruiting metric that’s the average amount an employer spends on to hire new people for their team. It measures all spend that goes into the recruiting and hiring process, including candidate sourcing, job advertising costs, referral bonuses (SHRM found referrals to be the most used sourcing tool) and onboarding.
How do you calculate average cost per hire metric?
This recruiting metric is your average spend on hiring new people in a specific time period. To calculate cost per hire, add up all internal and external costs (including time, labor, advertising, third-party partners, background checks, referral bonuses and other spend) for recruiting and hiring during your time period. Divide that sum by the number of people hired during that time period. Multiply by 100.
Cost per Hire = [(Total internal + external costs during time period) ÷ Number of people hired] x 100
Why cost per hire is an important recruiting KPI for decision making
When it comes to talent acquisition, one of the most common KPIs is cost per hire. There is so much value in tracking just how much it takes to fill an open position.
- Prove ROI of your overall recruiting function to your board and investors
- Make more informed decisions when investing in recruiting technology
- Validate the need for partners like Recruiting Process Outsourcing (RPO) providers
- Determine how much you have to spend to hire top candidates
- Protect your employer brand to better attract top talent
- Calculate employee referral bonuses
Yes, cost per hire matters. Like widely used benchmark, it also comes with a few misconceptions. Today, we’re setting the record straight on cost per hire.
Four things you must understand to make the most of cost per hire as a recruiting KPI
1. The lowest cost per hire isn’t always the best.
On the surface, it would appear that the lowest possible cost per hire is most desirable. The less it costs to bring someone on board, the better, right?
Not exactly. Why? Put simply, it takes money to make money.
The ultimate goal of a talent acquisition team is to attract and secure the best talent who can help your business move the needle within your industry, and that takes a higher cost per hire. A study by Bersin by Deloitte proves this. They ranked 500+ organizations into four levels based on the maturity of their talent acquisition functions. What they found was that “high-maturity” talent acquisition functions bring in 18% more revenue overall, as well as 30% more revenue per employee – all while spending two times more per hire than those organizations ranked as the least mature.
If your cost per hire is low but so is the quality of your talent, it’s time to re-think it. As the saying goes,
cheapest isn’t always best – and that applies to your hires as well.
2. Cost per hire isn’t completely in your control.
There are a lot of factors you can control when it comes to talent acquisition, like the tools you use to source candidates and the way you advertise open positions. What’s beyond your control is the state of the hiring market, and let’s face it, our current environment is challenging to say the least.
Why is it so hard to find talent? The most obvious reason is low unemployment rates. But there’s more. The national quit rate is also historically high. While people are willing to change employers, they’re passively job searching, meaning they’re often waiting for the right role to come to them, not the other way around.
What’s also beyond your control is the skill level that candidates bring to the table. Many businesses are in some phase of digital transformation, resulting in demand for certain technical skills that just don’t widely exist yet. There’s also much to be said about the soft skills gap that exists today. Deloitte lists the top missing soft skills as complex thinking, collaboration, teamwork and communication.
3. Cost per hire is commonly miscalculated.
At Advanced RPO, we help many of our clients to re-define cost per hire, as they’re often leaving out important considerations. Cost per hire is much more than the cost of a headhunter, contract recruiter and a background check/drug screen. It’s also comprised of many more factors, both transactional – like the cost of a hiring manager’s time – and strategic, such as investment in recruitment technology.
A common mistake most organizations make when calculating their cost of hiring is not including the time that goes into the logistics and communications with each candidate as they advance through the hiring process. Things like scheduling interviews, collaborating on a start date and answering candidate inquiry calls, emails or texts all take time, and must be handled thoughtfully to create a great candidate experience.
We really like this explanation of how to measure cost per hire. We also recommend leaning on your RPO provider, if you have one, to help you ensure you get it right.
4. Always look at cost per hire in context.
There’s strength in numbers, and that’s certainly the case when it comes to talent acquisition metrics. Cost per hire should be viewed in the context of your business and other important metrics. We mentioned above that quality of hire should be monitored right alongside the cost of hiring, but so should time to hire, source of hire and – here’s an important one – the cost of job vacancies.
The cost of your vacancies goes hand-in-hand with cost per hire. Openings left unfilled can set you back financially in lost revenue. Case in point: the cost of an unfilled technical role is currently estimated to be more than $500 per day. But job vacancies also negatively impact the business in other ways, like lost departmental productivity, decreased employee morale, lower customer satisfaction and so much more.
It’s also important to view your hiring costs in terms of industry standards, right? Yes and no. While standards can give you a good starting point, it’s critical to track your own internal company data, year over year. Every business is unique, which is why there’s no perfect cost per hire number to strive for. Consistently measuring your own data and looking for trends and anomalies will get you where you want to be.
While we’ve covered a lot of ground here, it’s important to give cost per hire the mind space it deserves. When tracked incorrectly or for the wrong reasons, it can actually set you back. But when viewed strategically as one of many metrics to consider, it can help you get the business results you want.
Ready to demystify another recruiting metric? Let’s talk time-to-fill.
Time-to-fill is important because in today’s competitive hiring environment speed is critical to success. Most organizations, however, don’t truly understand what goes into this recruiting metric or how to improve it.
Read Decoding Time-to-Fill: How Sub-cycles Impact Recruiting