Cost Per Hire

What is Cost per hire?

Cost-per-hire (CPH) is a recruiting key performance indicator (KPI) that measures the average cost of hiring an employee.

CPH is a fundamental recruitment metric that determines the average cost of hiring a new employee. It is calculated as a comparative indicator that reflects and involves the company’s current recruitment process.

Studies have shown that CPHs are directly linked to company maturity, which means that as a company grows, so does its CPH. It also varies depending on factors such as the nature of the role, position, and other related considerations.

Why is Cost Per Hire an important metric in talent acquisition?

Cost per hire in talent acquisition measures a team’s success, enabling it to meet organizational recruitment goals. Here is why it is an important metric.

• Improves efficiency: CPH helps assess how effectively you recruit, identifying areas for improvement to find better talent at a lower cost.
• Enhanced budgeting: It helps with budgeting and resource allocation to meet future hiring needs.
• Sets the benchmarking right: CPH enables you to compare recruitment costs against industry standards or previous performance.

Note: Tracking CPH as a critical metric helps in understanding the effectiveness of talent acquisition and, in the long run, saves time and resources from sourcing to onboarding.

How to calculate cost per hire?

The formula to calculate CPH is

Total internal costs include expenses such as recruitment staff salaries, administrative costs, training and development for recruitment staff, etc.

Therefore, the average cost to hire one new employee for this company, in Indian Rupees, is ₹2,000.

And the total external costs include advertising and marketing expenses for job postings, candidate travel, accommodation expenses for interviews, and other related costs.

How to reduce cost per hire?

Reducing cost per hire is vital to organization because:

• Streamlining Recruitment Process: Simplify your recruitment process to reduce time and resources by utilizing HRMS software.
• Leveraging Employee Referrals: Implement a referral program incentivizing employees to recommend qualified candidates.
• Emphasizing Employer Branding: Invest in employer branding to attract candidates directly to your company, reducing the need for costly job advertisements and recruitment agencies.
• Utilizing Technology: Invest in recruitment technologies such as applicant tracking systems (ATS) to make the process more efficient and cost-effective.
• Creating Better Job Descriptions: Job postings should be clear, concise, and tailored to the right audience to attract suitable candidates quickly and reduce the time and cost of hiring.
• Focusing on Quality Hiring: Prioritize quality candidates who fit the role and company culture to reduce turnover.
• Conducting Virtual Interviews: Conduct virtual interviews to save expenditure and time.
• Building a Talent Pool: Maintain a database of potential candidates for future roles.
• Offering Competitive Compensation: Offer competitive salaries to attract the right talent and reduce the need for negotiations.
• Calculating Metrics: Timely review your recruitment metrics to identify areas for improvement and adjust your strategies accordingly. Moreover, it optimizes business expenses.

FAQs

1. What are the main factors that contribute to the Cost Per Hire?

The main factors contributing to CPH can be broadly categorized into internal and external costs and others.

• Internal Costs: Compliance Costs, Administrative costs, Training & development.
• External Costs: Advertising and job posting, recruitment Agency Fees, Candidate Travel and Accommodation Pre-Employment Assessments, Onboarding and Training
• Others: Business size, Industry, Position level, Location, Recruitment process

2. What are the components of Cost Per Hire?

Cost Per Hire (CPH) components represent the total cost of hiring a new employee. These components can be divided into two main categories: Internal Costs and External Costs.

Here’s a detailed look at each:

• Internal Costs
• Recruiter Salaries
• Recruitment Training
• Interviewing Time
• Internal Systems
• Employee Referral Bonuses
• External Costs
• Job Advertising
• Agency and Search Firm Fees
• Candidate Travel and Lodging
• Background Screening
• Recruitment Events

3. What role does the time-to-fill metric play in understanding Cost Per Hire?

Time to fill offers a realistic view of how long it will take to replace a departed employee. It helps you plan your hiring efforts better and warns you when your hiring process takes too long.

4. How does the employee turnover rate impact Cost Per Hire calculations?

The turnover cost to a company can be incredibly high. It is estimated that losing an employee can cost a company one-half to two times the employee’s salary.

This is because a high turnover rate is directly proportional to a high CPH

• High turnover rate leads to need for hiring
• Hiring is more costly to the business than retaining new employees.

A high turnover rate necessitates frequent recruitment, escalating the costs associated with job postings, recruitment events, and the overall hiring process. Each new employee requires investment in training and onboarding, which can become a recurring expense with high turnover.