Hiring new employees is a crucial aspect of any business. But have you ever considered the cost of that process?
The truth is, recruitment efforts can quickly add up in terms of time, resources, and money, and this is where cost per hire (CPH) – a fundamental metric for companies analyzing their recruitment process and budget – comes into play.
In this article, we’ll define what CPH means, provide tips on how to calculate it effectively, and explore industry benchmarks to help you understand the bottom-line impact of your hiring practices.
Keep reading to learn more about how you can optimize your recruitment efforts while minimizing costs through the effective use of CPH data!
What Is Cost Per Hire?
Cost per hire refers to the total cost incurred by an organization in hiring a new employee.
To put it into perspective, imagine you’re trying to fill a position at your company.
To do so, you may have posted job listings on various websites or job boards and attended career fairs.
You might also have had members of your team working on screening resumes, doing background checks, and conducting interviews.
All of these efforts come with costs attached, from advertising expenses to travel costs, which add up over time.
By calculating CPH, businesses can gain insight into how much they’re spending per hire and whether those costs are justified by the quality of hires they’re making.
Understanding this crucial metric can help companies optimize their recruitment strategies while minimizing expenses associated with finding new employees.
Cost Per Hire Formula
The CPH formula is a key metric for any organization’s recruitment process that HR professionals use to analyze the effectiveness of recruitment efforts and identify areas where improvements can be made.
This formula helps organizations determine the efficiency and effectiveness of their recruitment process.
Calculating your CPH can help you identify areas where you might be overspending or where you could allocate more resources.
Plus, by monitoring this metric over time and comparing it with industry benchmarks, you can continuously improve your talent acquisition strategy while keeping an eye on your bottom line.
However, it’s important to note that not all expenses related to hiring can be easily quantified.
For example, indirect costs like lost productivity during onboarding or employer branding efforts may not have an exact value attached to them.
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How to Calculate Cost Per Hire
To calculate CPH, you need to consider both internal and external recruiting expenses.
Internal costs may include:
- salaries of recruiters
- referral bonuses
- the cost of your applicant tracking system
- in-house recruiting costs (such as job fairs or recruiting events)
- drug testing
- travel expenses
External recruiting costs might include:
- advertising on job boards or social media platforms
- agency fees for hiring through third-party recruiters or recruitment agencies
- travel costs associated with candidate interviews
- relocation fees
Once all relevant expenses over a specific period (such as yearly) have been identified, add up all internal recruiting costs and external recruiting expenses, and divide this total by the number of new hires made during that specific period.
That’s how you get your number!
Ok, now let’s slow things down a bit, otherwise calculating CPH becomes a pretty daunting task!
1. Analyze internal costs
First, it’s important to analyze internal costs. These are the expenses that come from within your organization, such as HR staff salaries and employee referral bonuses.
Begin by identifying all of the steps involved in your recruitment process. This may include posting job openings on job boards, reviewing resumes, and conducting interviews.
Then, determine which costs are associated with each step.
Next, determine how much time your human resource management team spends on recruiting new employees versus other tasks. This will help you understand the true cost of their labor when it comes to hiring new talent.
You should also consider any additional expenses related to bringing on a new employee. For example, onboarding processes can be costly due to training and orientation programs.
By analyzing these internal costs thoroughly and accurately and factoring them into your CPH formula, you’ll have a better understanding of the total investment required for each hire.
2. Identify external recruiting expenses
Next, identify all of the external recruiting expenses involved in your hiring process. These expenses can vary depending on your specific recruitment strategy.
One of the biggest external recruiting expenses is agency fees. If you use a recruitment agency to help fill positions within your company – whether full-time, part-time, or contract – you’ll need to factor in their fees.
This includes any percentage-based commissions they charge as well as any flat-rate fees associated with their services.
Another expense that often gets overlooked is relocation costs for candidates. If you’re actively seeking top talent from other cities or states, be sure to account for these additional expenses in your overall hiring budget.
Don’t forget about advertising costs associated with job postings or promoting open positions on social media platforms like LinkedIn!
These costs can add up quickly but are essential for reaching a larger pool of qualified candidates outside of traditional methods like referrals or internal hires.
By taking the time to identify all external recruiting expenses you’ll have a more accurate picture of what it truly costs to bring new external hires on board.
3. Determine cost per hire
After analyzing internal costs and identifying external recruiting expenses, it’s time to determine CPH.
This metric is important because it helps you understand how much your organization spends on each new employee brought onboard through recruitment efforts.
Take the sum of all internal and external costs associated with hiring a specific number of employees during a given period, then divide that total by the total number of hires made during that same period.
For example, if your organization spent $25,000 in internal recruiting costs and $50,000 in external recruiting expenses to make 10 new hires within a quarter, then CPH would be ($25,000 + $50,000) / 10 = $7,500.
It’s important to note that this metric doesn’t just include direct expenses like agency fees or job board postings. It should also factor in indirect costs such as travel expenses or relocation fees for new hires.
By regularly calculating CPH and tracking it over time, you can better understand your overall recruitment process and identify areas where you can reduce unnecessary spending, while still attracting top talent.
Tips for Effectively Calculating Cost Per Hire
To effectively calculate CPH, there are several tips that can help you streamline the process and get accurate results.
Calculate cost constantly
Calculating CPH is not a one-time activity. It should be an ongoing process that takes place periodically, depending on the hiring volume of your organization.
Doing it constantly throughout the year is better than waiting until the end of a set period, as it’ll give you more up-to-date data and allow for better decision-making.
For example, you’ll be able to monitor how much each new employee costs your organization and adjust your recruiting strategy accordingly, rather than waiting until next year to do so.
The recruitment process involves different stages, from job board posting to interviewing candidates, making offers, and onboarding new hires.
Each stage has its own associated cost that contributes to the total CPH and it’s important to keep track of all these expenses and update them regularly.
Calculating cost constantly also allows hiring managers to identify areas where they could cut costs without compromising quality-of-hire metrics – for example, reducing agency fees by increasing employer branding efforts.
Explore industry standards
When it comes to calculating CPH for your company, it’s important to have a benchmark to compare your results against. This is where industry standards come into play.
By exploring industry standards and benchmarks, you can determine if your CPH falls within an acceptable range compared to other companies in your field.
The Society for Human Resource Management (SHRM), for example, provides benchmarks based on company size and revenue, and can help you understand if your recruitment process is falling short – or excelling!
However, keep in mind that while industry benchmarks can be helpful as a reference point, they should not be the only factor you consider when analyzing your CPH.
Every company has unique needs and circumstances that may affect its recruitment process and cost of hiring. Take those benchmarks with a grain of salt and focus on finding solutions that work best for you.
Evaluate each department separately
Every department has different hiring needs and processes that can affect the overall CPH, so it’s important to analyze their specific costs separately in order to identify any areas where improvements can be made.
For instance, departments that require specialized skills or experience may need to use job boards or recruitment agencies to attract top talent. This means external recruiting costs may be higher.
On the other hand, departments with high turnover rates may spend more on internal recruiting costs such as employee referral programs or advertising vacancies internally. Always consider these factors when calculating CPH.
Another aspect of evaluating each department is looking at the quality of hires. Are new employees staying long-term? Are they meeting performance expectations? If not, it may be necessary to adjust recruitment strategies for those departments.
By analyzing individual department data, HR managers can identify areas where improvements are needed and adjust accordingly. This approach ensures a better return on investment in hiring efforts while keeping budgets under control.
Use data to plan strategically
By analyzing past CPH data, organizations can gain valuable insights that inform future planning efforts, identify areas of opportunity, and make strategic adjustments to their recruiting process.
One way to use this data is to determine which sourcing channels are the most effective in bringing in top talent.
For example, if you find that employee referrals have a lower CPH than job boards or recruitment agencies, consider incentivizing current employees to refer more candidates.
You may also want to allocate more of your recruiting budget toward these referral programs.
Additionally, analyzing time-to-fill metrics can help you plan ahead and ensure that you have enough resources available during peak hiring periods. This information can assist in determining whether additional recruiters or HR staff might be necessary.
Tracking retention rates and the quality of hires over time can help refine your recruitment strategy even further.
If certain departments consistently experience high turnover rates or struggle with retaining new hires beyond the probationary period, it may be worth investigating potential issues within those specific teams.
Overall, by using data strategically throughout the recruitment process, organizations can adjust their approach as needed and ultimately improve their bottom line by reducing costs while attracting top talent.
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Now Over to You
Calculating CPH is an important aspect of managing a company’s hiring budget.
It can help HR departments understand where they’re currently spending their money, identify opportunities for improvement, and make better, data-driven decisions to optimize their hiring process.
With this information, they can adjust their recruiting strategies to stay within industry benchmarks while focusing on attracting top talent with employer branding efforts, social media campaigns, or referral bonuses.If you’d like to learn about more useful HR terms, why not visit our HR Glossary and share this helpful resource with your HR department?