How to calculate recruitment cost per hire

With the proverbial belt tightening around budgets and headcount, talent leaders are especially focused on one metric — cost per hire (CPH).

Despite high quitting rates in the job market, growing companies still see hiring as an essential investment in their long-term plans. The recruiting environment is complicated, but breaking down the costs that go into hiring — and where to cut costs — can help bring some clarity to your next search.

In this article, we’ll share how to calculate your cost per hire, whether you’re conducting inbound or outbound recruiting, using an agency, or relying on employee referrals to fill open positions. Plus, we’ll explore the costs associated with the next phase of the hiring process, from onboarding to upskilling and retention.

Understanding the cost per hire formula

The average cost of hiring an employee in the US is $4,000, and it takes on average 36 to 42 days, varying by role. The process of finding that perfect hire involves multiple steps and phases, and the longer each of those phases take, the higher the costs.

In 2012, the Society of Human Resource Management (SHRM) and the American National Standards Institute (ANSI) created a standard formula for CPH, which equates to:

(Internal recruiting costs + External recruiting costs)
—————————————————————————
Total number of hires

Internal costs include everything in-house, from the salaries of talent team employees to the development costs associated with their learning and development. External recruiting costs relate to any agency, job board, or resource your team uses apart from your internal resources to conduct searches and make hires.

In addition to traditional CPH measurements, think about things like turnover and retention. Employee Benefit News reports, for example, that it can cost as much as 33% of an employee’s salary to replace them, in addition to the on-the-job knowledge that they take with them. A quick hire may be a costly hire if they only stay a short time

How to calculate cost per hire

To calculate your cost of hire, consider the people, tools, and time for each phase of the hiring process: recruiting, interviewing, and onboarding. Once you have the cost (and it makes sense to calculate based on level and department) then divide by your total hires over a set period of time — monthly, quarterly, or even annually.

Recruitment cost per hire

Whether you’re filling a vacancy, alleviating the team’s workload, or expanding a portion of your organization, different approaches to recruiting can have significantly different cost per hire and outcomes. As we explore each approach, think about where your qualified candidates are coming from and the ROI of your efforts.

Inbound recruiting

There’s plenty of talented candidates in the market, and they’re likely to find potential roles at your company, right? That’s the hope with inbound recruiting, which presents a more passive approach to attracting the interest of job-seeking professionals.

Companies engaged in inbound recruiting focus heavily on creating an employer brand story to encourage people to apply; designing a great careers page, compelling job descriptions, writing blogs, creating content, and sharing their values on social media. More than just posting openings on your own job board or LinkedIn, inbound recruiting is all about telling a true and authentic story about your company that will speak to the desires of active job seekers.

Inbound recruiting is an easy practice to get off the ground, but it doesn’t come without its challenges. You may have a member of your talent team willing to write a series of behind-the-scenes blogs, but those internal resources cost time and money. Plus, the efforts you make creating social media vignettes, for example, don’t always translate into making immediate hires.

When thinking about the cost per hire associated with inbound recruiting, it’s important to consider the short-term investment vs. your organization’s long-term goals. This method often leads to a quick influx of candidates, many of whom may not meet your qualifications because they haven’t been directly sourced. Some may sneak through the cracks and eventually land with your company, but not without your team spending additional time creating content and qualifying their candidacy.

Outbound recruiting

Outbound recruiting, on the other hand, is a short-term recruiting solution where your team is actively looking for talent to hire. When a new role opens up at the company, or a position needs to be quickly filled, outbound recruiting is the go-to approach.

Recruiters use software in their technology stack along with third-party tools from services like LinkedIn to find a pool of candidates they’d like to invite to apply for a specific job opening. It’s the more “traditional” idea of recruiting, where team members are picking up the phone and calling candidates or sending a “cold” email to qualified job seekers — jumping straight into the application process.

Whereas inbound recruiting is all about fishing from a large pool of talent, outbound recruiting is more of a fish-in-a-barrel approach — building a talent pool tailored to your company’s specific needs. Despite its ease on paper, outbound recruiting requires a significant investment in technological resources and time of your talent team.

The cost per hire associated with outbound recruiting will almost always be dictated by the external resources — sourcing tools you employ, conferences and events you attend to meet candidates — combined with the time it takes your top recruiting talent to move job seekers through the process. It can be  a quick-hit solution to fill an urgent need or a long-term recruiting strategy to nurture talent for when time is right for both parties. Both cases require an upfront investment in technology and people.

Referrals

When you empower your employees to become brand ambassadors, you’re creating an unexpected network for potential new hires. Referrals have become a popular option to attract talent, not only because they’re effective, but because they’re a cost-effective solution.

According to recent research, candidates from career sites start after 55 days, whereas employee referrals start after 29 days. They also finish training and onboarding sooner than hires from other sources, and save organizations on average $3,000 per hire.

What’s the catch? Well, companies must invest resources in a fleshed out referral program that employees can and want to use. Employees must also be willing to refer job seekers from their network, with the understanding that they’ll be rewarded for their efforts; in 2019, the average bonus paid to an employee for a referral was $2,500.

The cost per hire for a referral candidate is driven by the implementation of an automated employee referral program, along with the bonuses paid out to each successful hire. And at a smaller company, referral programs are an easy way to encourage growth while creating an environment where everyone feels included in the recruiting process.

Using an agency

A staffing firm or recruiting agency is a nuclear option, of sorts — it’s a great resource when you’ve hit a hiring ceiling or are in desperate need for highly specialized talent. The cost per hire associated with an agency depends on the specific agency’s pricing model and how they charge. Some require a percentage of the open role’s annual salary, some are retainer-based, and others simply charge a flat rate.

Staffing agencies can access talent pools you may not have access to, and in some cases, can find and fill positional gaps more quickly than your internal teams. However, while they can act as ambassadors for your brand, staffing agencies are not as well-versed in your company’s culture as your talent team or employees.

Agencies have a reputation for delivering high-quality candidates, but at a price; a price your talent team may not be able to justify, especially if other open roles need to be filled.

The approach you use will depend on your internal capacity to search for and qualify candidates in addition to the interviewing and onboarding they’re already doing. Plus, you will want to look at your workforce analytics to determine which channel brings in the highest quality candidates.

Interview process

Your sourcing process can have a big impact on this next phase. For example, the more involved hiring managers are in building the talent pool, the more confident they will be when interviewing top candidates.

Screening

Screening interviews are generally performed by the recruiting team to ensure that a candidate meets the initial filtering requirements for the company and role. Since these are generally a standardized procedure, the only costs associated with screening are the time spent by the recruiter engaging with the candidate.

Screening interviews can be conducted by phone, video call, or a questionnaire. If conducting a live conversation, these can typically be completed in 20-30 minutes.

Interviewing

Once a candidate passes the initial screening, they move into the interview phase. Depending on the role and the number of candidates, this can take several days or weeks to schedule and execute.

Costs for interviewing will depend on the number of people involved in the interviews and how long they take to conduct. For example, a 3-day interview that involves flying a candidate out to the office to meet with team members, managers, and top executives will be a significant cost.

Meanwhile, simpler interviews that don’t involve executives or partners will keep costs lower. When structuring your interview process, you’ll have to factor in the hourly rates of every employee spending time to evaluate candidates.

A single 8-hour interview day can easily cost a company upwards of $1000 depending on the employees involved. Conducting as many interviews as possible virtually will make scheduling much easier across the board. There are many software tools that can automate scheduling to save time and effort.

Consistent analytics and tracking will help your team hone in on the perfect interview format and ensure you’re not spending more resources than necessary.

Making the offer

Once the interviews are done, it’s time to send out the offer. Recruiting teams should move quickly at this stage, because it’s likely that top candidates will be interviewing with other companies and might have other offers on the table.

A phone call is generally preferred, so you can share mutual excitement about the opportunity and answer any additional questions about the role. This is followed up with a formal email with an offer letter attached.

Having offer letter templates that can be adapted for each role helps to expedite the process and keep costs to a minimum.

Onboarding and training

According to a Training Magazine report, companies spend an average of 46.7 hours to train an employee, and it costs an additional $986 in training expenses.

Onboarding: The first 90 days

The first 90 days are crucial in the onboarding process. During this initial period, you’ll want to bring a new hire up to speed as quickly as possible without rushing past any key details or information about the role and company.

SHRM identified the four main elements employees need to develop during the onboarding process as self-confidence, role clarity, social integration, and knowledge of culture.

Companies should formalize their onboarding process to increase efficiency and ensure that every new hire starts from the same foundation. From preparing for their first day orientation to ongoing monitoring and evaluation, the more organized your onboarding process is, the easier it is for new employees to get up to speed.

Getting up to speed

According to a Harvard Business School survey of 210 CEOs, business owners expect an employee to reach the break-even point six months into the job. After six months, an employee should have enough training and institutional knowledge to add value to an organization.

Upskilling and retention

According to the SHRM, employee turnover can be as much as 50% in the first 18 months of employment. So once you make a great hire, retention is incredibly important.

Training and upskilling employees needs to be an ongoing investment for companies who want to retain talent. According to Gartner – a research and advisory firm – the number of skills required for a single job increases by 10% every year. So employees who aren’t receiving ongoing training are falling behind their peers. Another 2022 Deloitte study found that younger workers are more likely to stay with an employer who offers opportunities for personal and professional growth.

When you consider the full scope of costs associated with losing an employee including recruitment costs, onboarding, lost productivity, training costs, etc., it’s clear that effective employee retention is essential to keep your top talent within your company and stay competitive.

Why does cost per hire matter?

Why bother going through all the effort to calculate cost per hire? Because over the long run, your recruitment strategy can have a massive impact on your company’s bottom line.

In a competitive and uncertain market, talent teams have to be prepared to make the case for their budget, their headcount, and the value they’re bringing to the organization. Having data-based results to show company leadership is a great way to clearly demonstrate your value.

Our research shows that cost per hire is one of, if not the most important metric for companies tracking their recruiting efforts. However, it’s not the only piece in measuring your organization’s success. Having visibility into every stage of your talent funnel, with access to competitive insights and industry benchmarks, can help you eliminate any guesswork.

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