What Is Cost Per Hire? Formula, How to Calculate & Importance

Internal costs are often overlooked because they’re intertwined with daily operations, making them harder to separate and quantify. But make no mistake, these have a substantial impact on your overall cost per hire.

Here are some of the most common internal costs involved in recruitment:

• Salaries of HR staff: This includes the portion of their salaries that is dedicated to recruitment activities, from screening resumes to conducting interviews.
• Overhead costs related to recruitment activities: These could include utilities, office space, equipment, recruitment software, and any other resources used by your HR team.
• Time spent by non-HR staff: Often, employees outside the HR department are involved in the recruitment process. For instance, managers who review applications or conduct interviews.
• Compliance: When you hire employees, you need to comply with federal and state labor and employment laws, including anti-discrimination laws like Title VII of the Civil Rights Act of 1964. Many states and cities also have pay equity and transparency laws which you’ll need to adhere to as well. Compliance may not seem like an internal cost at first glance—but adhering to these laws requires regular education and training for your internal team, possibly even consulting with an outside expert to provide updates.
• Training and development: Once a new hire is onboarded, there might be training programs to get them up to speed. The cost of developing and delivering these programs adds to your cost per hire.
• Administrative costs: These are the costs associated with processing new hires, such as background checks, paperwork, and onboarding processes.

Internal costs often sneak up on you. You might think you’re saving money by handling recruitment in-house, but when you add up these internal costs, you may find that they represent a significant portion of your cost per hire, especially for very small businesses where many employees participate in the hiring process, at least in some fashion.

Understanding your internal costs can help you identify inefficiencies in your recruitment process. Are you spending too much time screening resumes? Are your training programs costly and ineffective? By pinpointing these issues, you can take steps to streamline your process and reduce costs.

External costs have a habit of standing out—they’re the invoices that land in your mailbox, and the charges that show up on your credit card statement. These are what most people think of when discussing the cost to hire employees.

Here are some of the most common external costs involved in recruitment:

• Advertising: This includes costs associated with promoting job vacancies through various platforms, like job boards, social media, or your own website. Some job boards offer free options.
• Recruitment agencies: If you use a recruitment agency to find candidates, their fees will form part of your external costs. If you’re hiring a temp worker, you’ll pay a higher hourly rate and the recruitment agency will take a portion of the hourly rate as their fee. If you hire a direct employee through a recruitment agency, expect to pay upward of 30% of the employee’s first-year annual salary as a fee.
• Job fair participation: Attending job fairs can be a great way to meet potential candidates, but it also comes with costs for registration, setup, and promotional materials.
• Background checks and pre-employment testing: Many companies conduct background checks or skills tests before hiring a candidate. While not always necessary, when used, they will increase your costs to hire.
• Relocation costs: If you hire someone from out of town, you might cover their moving expenses if the job requires their presence in person. While not a frequent cost, it can significantly increase your cost per hire when it does occur.

External costs can significantly inflate your cost per hire, especially if you rely heavily on agencies or spend big on advertising. However, they also offer opportunities for savings. By analyzing these costs, you can identify where your money is going and whether those investments are paying off.

Are you getting outstanding candidates from that expensive job board? Is that recruitment agency worth its fees? By asking these questions, you can make informed decisions about where to allocate your resources.

The total number of hires may vary by company. This includes any type of employee that you’re looking to hire, be they full time, part time, or seasonal, as well as any freelancers or independent contractors.

This figure will vary as you go through different hiring phases—so it won’t always be fixed. If you need to hire several administrative assistants at once, then you’d include all of them as individuals, not just one for the single job title.

Various factors can influence your CPH, nudging it up or down. Here are a few to consider:

• Industry standards: Different industries have different hiring costs. High-skill industries, for instance, often have higher CPH due to the need for specialized talent. Monitoring industry benchmarks can help you understand whether your CPH is on par, above, or below average.
• Size of the company: Generally speaking, larger companies have lower CPH. They benefit from economies of scale, have more resources to dedicate to recruitment, and can spread fixed costs over a larger number of hires. Smaller businesses might face a higher CPH due to limited resources and less frequent hiring.
• Hiring strategies: Your approach to hiring can significantly influence your CPH. For example, if you rely heavily on external recruitment agencies, your CPH will likely be higher than if you primarily recruit in-house. Similarly, investing in employer branding can lower your CPH in the long run by attracting higher-quality candidates and reducing turnover.

Calculating CPH should be a regular part of your recruitment analysis. It’s not a one-and-done deal. As a rule of thumb, calculate CPH annually for budget planning and forecasting. However, if you’re making significant changes to your hiring strategy, consider calculating it quarterly to monitor the impact of those changes and to ensure you’re properly allocating financial and staffing resources.

Trimming your CPH is about efficiency. Streamline your hiring process, leverage technology, and focus on employer branding to attract quality candidates. Reduce reliance on expensive external agencies by building in-house recruitment capabilities. Remember, though, that a low CPH should not compromise the quality of hires. Balance is key in this aspect.

While a good CPH can vary based on industry, company size, job requirements, and other factors, the average cost to hire is around $5,000¹. That’s a good place to start—but don’t be too concerned if your number is higher. You may be hiring more skilled workers, which inevitably requires more resources. Over time, you’ll get a better understanding of where your company’s CPH should sit.

Calculating CPH isn’t busywork. It’s a valuable tool that gives you insight into the efficiency and effectiveness of your hiring process. It aids in budget planning, helps refine recruitment strategies, and ultimately leads to better hires. In short, it’s about making sure your recruitment dollars are well spent.