Cost per hire (CPH) is the total expense an organization incurs to recruit and onboard a new employee. This calculation includes internal and external expenses, like job ads, onboarding, compliance, hiring manager salary, and more. Knowing your cost per hire gives you the power to make informed decisions, optimize your hiring strategies, and ultimately, control your hiring budget.
- Cost per hire formula: Cost per hire = (Internal costs + external costs) / Total number of hires
- Average hiring costs are around $5,000 but will vary depending on your industry and other factors
- A lower CPH doesn’t always equate to better hiring practices—balancing cost to the quality and efficiency of your hiring process is key
Cost Per Hire Formula
Here’s the standard formula used to calculate cost per hire:
In a gist, CPH factors in internal and external costs. Internal costs are slightly less tangible, encompassing elements like the time spent by HR personnel, managers, and interviewers throughout the selection process. External costs are those that are immediately attributable to the hiring process, such as advertising fees, job board subscriptions, recruitment agency fees, and any software used for applicant tracking.
Click below to see some examples of each facet of CPH, as well as some factors that may affect the resulting value.
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.
How to Calculate Cost Per Hire (6 Steps)
In order to effectively and efficiently calculate a cost per hire, you can follow these steps:
Step 1: Identify Your Internal Costs
Start by listing out all your internal recruitment costs from the past year, or whatever time period you’re evaluating. You may have to do some estimating on internal costs.
For instance, if your company doesn’t have a dedicated talent acquisition team, then you’ll need to estimate how much time each employee spent on the hiring process. If your hiring manager makes $35 per hour and you estimate they spent 380 hours sourcing, interviewing, and onboarding new hires last year, that equates to $13,300 of internal expenses just for your hiring manager.
You need to do this with each employee involved in the hiring process. You also need to calculate any additional internal costs.
Here’s an example of what these might look like:
Sourcing candidates (HR admin time to post jobs and source candidates, conduct initial resume review)
Hiring manager’s time (hourly wage x hours spent) (review of most qualified resumes, plus time spent in interviews and discussing candidates)
Compliance (advice from outside consultants and training internal staff)
Office equipment and supplies (providing new hire with a computer and accessories)
Total Internal Cost
Step 2: Identify Your External Costs
Next, you’ll want to do the same for your external costs. These are usually easier to locate and capture since they’re more defined.
Here’s what these might look like:
Background check vendor
HR software license
Skills testing programs
Total External Cost
Step 3: Count Your Hires
Next, determine the number of new hires you’ve brought on board in the same period. For this example, let’s say that number is 10.
Step 4: Apply the Formula
We know the formula for calculating cost per hire is as follows:
So in our hypothetical scenario, you would calculate your CPH as follows: ($20,000 + $15,700) ÷ 10 = $3,570. This means your average cost per hire is $3,570.
Is that sufficient? It depends. If you’re hiring part-time administrative workers, it’s probably not great. If you’re hiring highly skilled technical engineers, then it’s pretty good. But it depends on many factors specific to your company and industry.
Step 5: Analyze Your CPH
Take a moment to evaluate your CPH in the context of your industry, company size, and hiring strategies. Is it higher than the industry average? If so, it might be worth investigating why.
A low CPH isn’t always better either. Hiring quality candidates often requires investment. If you’ve attracted top talent, your higher CPH could be a sign of money well spent.
Step 6: Monitor and Adjust
CPH isn’t a one-time calculation. It’s a metric you should monitor regularly to keep tabs on your recruitment efficiency. Are costs creeping up without an increase in hire quality? It might be time to adjust your recruitment strategies.
Why Cost Per Hire Is Important
There’s a saying in business, “What gets measured gets managed.” In the realm of recruitment, this principle is embodied by your CPH. For small businesses, understanding CPH is not just beneficial; it’s crucial. The goal of this metric isn’t just to put a price tag on recruitment, but to bring into sharp focus the financial implications of talent acquisition, and to understand the value of high retention.
Budget Planning and Forecasting: Running a business without a budget is like sailing a ship without a compass—you’re likely to get lost. Knowing your CPH allows you to forecast your recruitment expenses accurately, ensuring that you don’t overshoot your budget or underspend and miss out on top talent. It’s about striking the right balance.
Let’s say your CPH last year was $5,000, and you plan to hire 10 employees this year. Simple math tells you to set aside $50,000 for recruitment. Without knowing your CPH, you’d be shooting in the dark.
Informed Decision-Making: Ever wondered if that expensive job board is worth it? Or if using a recruitment agency yields better candidates than in-house efforts? Your CPH holds the answers. By analyzing your costs, you can see where your money is going and whether those investments are paying off.
For instance, if you notice your CPH spikes when using a certain job board but the quality of hires isn’t improving, it might be time to reconsider your approach. Your CPH is a compass guiding you to make smarter decisions about your recruitment strategies.
Competitive Edge: In today’s competitive job market, attracting top talent is key to staying ahead—but so is managing costs. Understanding your CPH gives you insight into how efficiently you’re hiring compared to industry standards. Are you spending too much? Too little? Your CPH can give insight into that.
Your CPH isn’t just a number. It’s a tool, a navigational aid on your journey to successful hiring. It empowers you to plan your budget accurately, make informed decisions, and gain a competitive edge. So don’t ignore it. Embrace it. Your bottom line will thank you.
Cost Per Hire Frequently Asked Questions (FAQs)
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.
Remember the formula: Cost per hire = (Internal costs + external costs) / Total number of hires. It’s simple, yet powerful. With it, you can forecast budgets with pinpoint accuracy, make informed decisions about where to invest your recruitment dollars, and gain an edge in the competitive job market.
Don’t just read this and move on—take action. Calculate your CPH today, analyze it, and understand it. Use it to steer your recruitment ship toward success. What gets measured, gets managed.