A Detailed Overview: Cost-Per Hire in Recruitment
Before you invest in hiring an employee, you need to ask yourself this one question: “What is the cost of hiring a new employee?”
The costs involved in every organization are different. For some, the costs are lower and for some, they are higher. If the cost per hire for your new hires is lower, you’re doing it right.
But if it’s the latter, you need to revisit your recruitment costs and optimize them. And how to do it?
Well, this article outlines everything that you need to know:
- What is cost-per-hire?
- What is the cost-per-hire formula?
- How to calculate this metric?
- How to use cost-per-hire data?
- Which factors influence the cost per hire?
- How can you reduce your cost per hire?
What is cost-per-hire?
Cost-per-hire is a recruiting metric that measures costs associated with hiring employees. These expenses include:
- Sourcing and recruitment advertising costs
- Referral bonus program costs
Put simply, cost-per-hire is the average amount you spend on a new hire in a given period.
For example, if you plan to hire 100 new employees in the current year with a budget of $2,00,000, the cost-per-hire will be $2,000.
What is the cost-per-hire formula?
The cost-per-hire formula is the sum of internal and external recruiting costs divided by the total number of hires in a given time frame.
Cost-per-hire = (Internal recruiting costs + external recruiting costs) / total number of hires within the timeframe
Internal recruiting costs
Internal recruiting costs refer to the internal staff, capital, and organizational costs of the recruitment function. These costs include:
- In-house talent acquisition team salaries
- Salary costs of hiring managers’ time
- Learning and development costs of your recruiting team
For example, referral bonuses offered to employees and people outside your company are considered internal costs of recruiting.
External recruiting costs
External costs refer to any expense incurred by external vendors or vendors during the recruiting process. These include:
- External agency fees
- Posting on job boards
- Aptitude test providers
- Employer branding activities
- Relocation expenses
- Applicant tracking system fees
For example, the premium fee paid to job boards like Crunchboard to hire developers is considered the external cost of recruiting.
Also, read: Optimize Your Hiring Process With Recruitment Analytics
How to calculate cost-per-hire?
To calculate the cost-per-hire, you need to follow the following steps:
Step 1: Collect the cost data
First, locate the cost report for a specific period. Divide them into monthly reports to calculate monthly expenses.
If you don’t have the report, ask your finance team to get it for you.
Also, get cost data for your entire recruitment team separately.
For example, HR and talent acquisition cost data should be separate.
Step 2: Record your internal costs
Capture all the costs of your in-house recruitment team. Next, list all the expenses in one column and the associated expenses in the second column. Add up all internal expenses and calculate the total cost.
|Internal costs||March (in USD)|
|Cost of sourcing||3000|
|Talent acquisition team cost||5000|
|IT equipment and support||800|
|Training and development||1000|
While listing down these expenses, be mindful of the total number of people in your department you’re calculating the costs for.
For example, if you can’t find the separate cost data for your recruitment team, and only have the cost data for HR, calculate the total number of people you have in HR including the talent acquisition team.
Here’s the breakdown:
Suppose you have 10 HR team members, 4 of which are from talent acquisition. Now, to calculate costs, divide the number of talent acquisition team members by the HR team members i.e., 4/ 10 = 0.4
If you convert the result to a percentage, it means 4% of the internal costs are related to the talent acquisition team.
Step 3: Add your external costs
Similarly, list down all external expenses in one column and their costs in the second column, and calculate.
|External costs||March (cost in USD)|
|Recruitment agency fee||2000|
Step 4: Add the total number of hires
Finally, add the total number of people you hired in the specific month.
|Total number of hires made in March||6|
Step 5: Complete the calculation
Now, based on the formula, calculate the cost per hire.
Cost-per-hire = ($11,100 + $22,500) / 6 = $5,600
So, your cost-per-hire for each hire you made in March is $5,600
Also, read: 5 Steps To Creating A Recruiting Dashboard (+ Free Template)
How to use the cost-per-hire data?
So now you know how to calculate the cost-per-hire. What next?
Ask yourself these two questions:
- What will you do after getting the cost-per-hire for each hire?
- What will you do with those insights?
Know this: knowing how to calculate cost-per-data is futile for you is you have no idea on how to use it to optimize the hiring process. So, here are a few ways you must know to use cost-per-hire data the right way.
1. Track the cost-per-hire regularly
Keeping track of your cost-per-hire helps you do two things: build your budget for each hire realistically and understand how your business is performing.
As calculated above, the cost-per-hire for each employee you hire is $5,600. However, your budget is only $4,500. Clearly: you’re over budget and spending far beyond your budget on new hires. This can directly impact your business performance too, as the budget allocated for other aspects of your business will get affected.
It’s like tracking your personal expenses. When you don’t track your spending, you don’t know how much you’re spending. But the reality is, you’re overspending. Now you can calculate your tech hiring ROI.
2. Calculate the cost data for each department
Cross-examine the cost-per-hire for each department and position. This helps you identify areas where you may be able to lower costs without damaging current processes or increasing them if necessary.
3. Estimate your cost-per-hire for future spending
When budgeting for personal expenses, you calculate the fixed expenses for the next month beforehand. You already know the salary credited to your account each month. Based on that, you’ll budget for your expenses, investments, and needs.
It’s the same with cost per hire costs. If you know the fixed estimate of the number of candidates you’ll need in each department beforehand, you can calculate the expenditure and budget for it. This will avoid the surprise of unexpected expenses.
Once you’ve calculated the fixed estimate of the number of candidates for each department, identify the average cost-per-hire for each department. Multiply this by estimated hires. This way, you’ll already know how much you’re spending on each hire if you hire a specific number of hires in a specific month.
Also, read: Data-Driven Recruiting: All You Need To Know
4. Evaluate it with other metrics
Measure your cost-per-hire against other metrics like quality of hire, or source of hire such as employee referrals, and optimize your hiring process.
What factors influence your cost-per-hire?
The main factors that influence cost-per-hire include industry, staff size, location, and position level and type.
If you have shopped at a local store and a premium brand, you know the difference in costs. To some people, apparel purchased from a local shop may seem costly whereas apparel purchased from high-end malls may be cost-effective.
This simply means that what seems costly to one may be cost-effective for another. The same applies to the cost per hire as well.
The cost-per-hire for different industries varies, which means if the cost per hire for one industry seems higher, it could be moderate for another industry.
Larger companies, usually 200 and above aim for a lower cost-per-hire than smaller companies. Reason? Small and midcap companies don’t have enough resources to hire on a larger scale which makes each hire costly.
However, larger companies have the resources and budgets to hire. With a lower cost per hire, their hiring processes are more efficient with a lower time to fill—leading to a lower cost per hire.
Bigger cities equal larger talent pools. When candidates live in such a large city, it is easier to access and hire them. But when you hire candidates remotely, or from another city, you must bear relocation and additional travel expenses. This simply adds up the recruitment costs making the cost per hire costly.
In such cases, two options work better: hiring employees from the same locations as yours where the company operates or working remotely. So, all you have to do is bear the charges for the laptop and accessories, and the software.
Position level and type
Which position the candidate is hired for matters.
Here’s the thing. The cost-per-hire for an entry-level or junior role will be lower than for an executive or leadership role. It simply boils down to the responsibilities they take on and the years of experience they have.
Evidently, that’s a huge difference, right? It simply boils down to the position, responsibilities, and years of experience that affect the cost-per-hire.
How can you reduce your cost-per-hire?
At this point, you know everything about the cost-per-hire to the formula and how to calculate it. But, that’s only half-baked information. So, what more?
Well, you need to know how to reduce the increasing recruiting costs for your company? Here are 5 ways you can do it:
Envision your ideal candidate
First, define your ideal candidate by developing a candidate profile. Here are the following steps you need to take:
- Define the job role and responsibilities—What responsibilities will the candidate handle? List them down in detail
- Consider company culture and values—Do your company values and the ideal candidate’s values align? Include the values your company abides by and those the candidate should share as well.
- Define hard and soft skills—What technical and soft skills do you look for in this ideal candidate’s profile?
Take a look at how HackerEarth has outlined the key role and responsibilities of the next engineering manager they are hiring.
The company has used keywords like ‘responsible for’ to highlight the key responsibilities of the job profile.
They emphasize technical skills like Java and Python, and soft skills like building relationships and collaborating with others.
Screen candidates with skill assessments
Companies that use manual screening methods invest enormous time and effort increasing the cost-per-hire.
But by replacing manual screening with skill assessments, you automate the hiring process, further reducing the cost-per-hire.
And so, you need to start integrating technology in your screening process. One way to do it is by leveraging skill assessments to evaluate and screen candidates based on their skills instead of scanning through their resumes.
Zalora found it time-consuming to evaluate developers’ coding skills without skills-based assessment tools.
With their traditional recruitment method, technical recruiters had to go through each developer profile manually, and then interview the candidate, making the entire process cumbersome.
When developers attend interviews, we dedicate a lot of time. For instance, for each role, we get at least ten candidate applications. Normally, for each candidate, we would end up investing an hour in interviewing. Imagine doing that for ten people. Also, in the end, only 20% of candidates are selected, which means a lot of time is wasted.
– Phuong Huynh, Technical Recruiter, ZALORA
Due to this manual recruitment process, it used to take a month to close the offer. This made scaling the recruitment process and interview-to-hire ratio harder for Zalora.
👀Result: The quality of candidates and the interview process at Zalora was streamlined which improved the company’s interview-to-hire ratio and overall recruitment productivity.
Also, read: How ZALORA reduced shortened its recruitment cycle by 50%
Build a strong employer brand
When you build a solid employer brand, your social media channels highlight the company’s values and culture, current employees and projects, and the company’s overall progress.
By learning about the company’s vision and how they value their employees, a candidate is attracted to the company and applies.
Take a look at Evernote’s LinkedIn page where they have a section called Life where they showcase their company culture.
Under the section Life, they have subsections: Life at Evernote and Engineering at Evernote.
- Life at Evernote—Under this subsection, you’ll see Evernote’s culture, values, company photos, and employee testimonials.
- Engineering at Evernote—Under this subsection, you’ll see what Evernote engineers do, their engineering leaders, and testimonials from employees.
This section on Evernote’s company’s page gives a glimpse of their work environment and how they operate. Plus, testimonials by employees are an effective way to strengthen a candidate’s trust in the company bringing in inbound candidates.
Also, read: How Tech Recruiters Can Build Better Employer Branding with Marketing?
Automate your recruitment processes
With automated recruitment, recruiters can enhance their productivity in several ways such as:
- Speed up the time-to-hire
- Increase the number of resources available for candidate engagement efforts
- Improve process visibility across hiring teams
- Reduce unconscious bias in hiring decisions
When you automate your recruitment process, you can streamline several low-value and high-value tasks that would have taken you hours and hours. By automating these tasks, you can focus on more critical tasks that need your attention.
For example, Moengage relied heavily on manual screening and interviews. It was time-consuming especially when recruiters and hiring teams wanted to reach their hiring targets. That’s when they decided to take the automation route and opted for HackerEarth Assessments.
They could invite more candidates to take the tests and filter out the top performers. Finally, the company had to interview only 5-6 candidates instead of 15 candidates. It could complete the entire recruitment process from sourcing to onboarding in just 10-12 days.
Also, read: How HackerEarth Helped MoEngage Drive a 50% Improvement in the Quality of Candidates Interviewed
Leverage social media recruiting
Just like online shopping via social media, social recruitment has spread its wings across major social media channels like LinkedIn and Twitter.
According to CareerArc’s 2021 Future of Recruiting Study, 86% of job seekers use social media in their job search for relevant jobs. They apply for jobs directly on social sites and engage with job-related content.
Clearly: recruiters who are active on social media have a big advantage. Because they are active on social media, they can share job posts on their social media handles and reach candidates who’re already following them.
When more employees from their company share the hiring post on their social media channel, the reach increases, giving the job-related post more visibility.
Here’s how Emil Hajric, CEO at Helpjuice shared a hiring post on his LinkedIn profile.
When a prospective candidate uses the keyword ‘hiring a developer’ or follows Emil, they’ll see this post shared by him and apply for the job.
Furthermore, if recruiters have a strong hand in social recruiting, they won’t have to spend money on job boards to publish job posts and attract candidates. How much does it cost to hire a new candidate?
Optimize your recruitment costs
It’s easy to get lost and overspend on your recruitment costs unless you’re aware of your internal and external costs. So, the best way is to take note of these recruitment costs, analyze your recruitment budget and optimize these costs (internal and external) based on your budget.
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