Recruitment is an essential but costly aspect of business operations. Many employers underestimate the true financial impact of hiring new employees, leading to inefficient processes that waste time and resources. Hiring cost is the total expense incurred by a company to recruit, onboard, and integrate a new employee, including direct and indirect costs.
In this article, we will discuss various cost factors involved in hiring, explore methods to calculate these expenses, and highlight strategies to reduce overall recruitment costs. Effective recruiting dashboards provide real-time insights into these costs, enabling HR teams to make data-driven decisions that enhance hiring efficiency and maximize return on investment.
1. Breaking Down the Cost of Hiring a New Employee
According to the Society for Human Resource Management (SHRM), the direct replacement cost for a departing employee can range from 50% to 60% of their annual salary. For highly skilled professionals, this figure can rise to as much as 200%. Hiring costs comprise both direct and indirect expenses that companies must account for when recruiting new talent.
Key Cost Factors in Hiring
The expenses related to hiring can be broken down into several major components:
- Recruiting and Sourcing Costs: This includes expenses for job boards, recruitment events, marketing, and any software used to attract applicants.
- Training Costs: New hires require initial and ongoing training, often affecting productivity until they reach full competency.
- Compensation and Benefits: In addition to salary, companies provide benefits such as health insurance, vacation time, and sometimes additional perks.
- Accommodation and Onboarding: This includes workspaces, equipment, and other resources needed to integrate new employees.
- Unengaged Workforce: Low engagement among new hires, often due to poor onboarding, can lead to reduced productivity and high turnover rates.
2. Calculating Cost per Hire
Cost per hire (CPH) is a valuable metric for assessing the efficiency of a company’s recruitment process. CPH includes all internal and external costs associated with hiring divided by the number of hires within a set period. This calculation provides HR teams with insights into their recruiting expenditures and helps in optimizing budget allocations.
Formula for Cost per Hire
The formula for calculating CPH is as follows:
Cost per Hire=Total Internal Costs+Total External CostsTotal Number of Hires\text{Cost per Hire} = \frac{\text{Total Internal Costs} + \text{Total External Costs}}{\text{Total Number of Hires}}Cost per Hire=Total Number of HiresTotal Internal Costs+Total External Costs
This calculation accounts for a range of expenses, including recruiting staff salaries, job board fees, marketing costs, interview expenses, and pre-employment screenings. By regularly monitoring CPH, companies can identify inefficiencies and streamline their hiring processes.
3. Analyzing the Breakdown of Hiring Costs
Different roles and industries incur varied recruitment expenses. For instance, SHRM reports that the average CPH is approximately $4,700, but it can exceed $28,000 for executive roles. Here’s a breakdown of average costs by industry:
| Industry | Average Cost per Hire |
| Accommodation and Food Service | $1,070 |
| Manufacturing | $3,497 |
| Education and Public Administration | $4,160 |
| Healthcare and Social Services | $4,770 |
| Professional Services | $6,200 |
| Nonprofits | $4,151 |
Understanding industry-specific benchmarks allows companies to measure their recruitment efficiency relative to competitors and set realistic budget expectations.
4. Key Benefits of Tracking Cost per Hire
Monitoring CPH offers numerous advantages to HR professionals, such as:
- Cost Savings: Tracking CPH enables companies to allocate resources more efficiently, reducing redundant expenses.
- Better Financial Accountability: By understanding recruiting expenditures, companies can adjust budgets to focus on high-performing channels.
- Improved Recruitment Process: CPH helps identify bottlenecks in the hiring funnel and streamline candidate selection.
- Enhanced Time to Fill: Efficient hiring processes reduce vacancies, preventing productivity losses.
However, lower CPH doesn’t always mean better results. Quality of hire should be considered alongside CPH to avoid making compromises that could lead to bad hires and higher turnover rates.
5. Strategies to Reduce Cost per Hire
By implementing best practices, companies can optimize their CPH while maintaining the quality of new hires. Here are some proven strategies:
5.1 Track CPH Against Industry Benchmarks
Regular benchmarking helps HR teams evaluate their recruitment efficiency compared to other organizations. If a company’s CPH exceeds the industry average, it might need to reassess its recruitment strategy and explore lower-cost channels.
5.2 Evaluate Cost per Hire by Source
Different recruitment channels come with varying costs. For instance, employee referrals tend to be more cost-effective than external recruiters or paid job boards. Analyzing CPH by hiring source allows companies to focus on the most efficient methods, reallocating funds from high-cost, low-return channels.
5.3 Invest in Skills-Based Hiring
Skills-based assessments streamline the hiring process by pre-qualifying candidates based on their abilities. This approach reduces time and resources spent on unqualified applicants, improves quality of hire, and ensures that new hires can meet job requirements from the start.
5.4 Encourage Employee Referrals
Referral programs are one of the most efficient hiring methods, often resulting in quicker hires at a lower cost. Employees who refer candidates also tend to boost retention rates since the referred candidates are often a good fit for the company culture.
5.5 Consider In-House Promotion and Training
Internal hiring saves recruitment costs, as existing employees require less onboarding and are already familiar with the company’s operations and culture. Training and promoting from within also boosts morale and encourages employees to stay, lowering turnover rates.
5.6 Implement an Applicant Tracking System (ATS)
An ATS automates various recruiting tasks, such as resume screening and interview scheduling. By reducing manual tasks, an ATS improves hiring speed, reduces administrative costs, and enables HR teams to focus on higher-value activities, such as interviewing top candidates.
6. Monitoring and Interpreting Cost per Hire
CPH should not be analyzed in isolation; instead, it needs to be considered alongside other metrics, such as quality of hire and time to hire. A low CPH is not beneficial if it leads to frequent turnover or poor-quality hires. Context is essential for interpreting CPH accurately. For example, if hiring costs increase temporarily due to an expected hiring surge, it should be contextualized within the broader strategy.
7. The Importance of Corporate Culture in Hiring Costs
Building a strong corporate culture can reduce CPH by decreasing turnover and enhancing employee engagement. Candidates aligned with company values are more likely to thrive and stay with the organization, reducing the need for frequent replacements. Cultural fit assessments help HR teams gauge whether a candidate’s values align with those of the company, preventing costly mis-hires.
8. Cost of Unengaged Workforce
An often-overlooked factor in hiring costs is the expense associated with an unengaged workforce. High turnover leads to poor morale and diminished productivity, which can spread across the organization and affect overall performance. Engaging new hires early on through effective onboarding and supportive corporate culture is essential for maximizing the return on hiring investments.
9. Best Practices to Improve Cost per Hire
Implementing these additional best practices can further optimize recruitment efficiency:
- Regularly Audit Recruitment Costs: Conducting periodic audits of hiring expenses helps identify and eliminate inefficiencies.
- Use Data Analytics: Data-driven insights can reveal the most productive recruitment channels and improve overall decision-making.
- Create a Flexible Budget: Hiring needs fluctuate, and a flexible recruitment budget allows companies to allocate funds to where they’re most needed.
Conclusion: Viewing Hiring as an Investment
Hiring should be approached as an investment, not just an expense. By strategically managing recruitment costs and focusing on quality of hire, companies can build a more productive workforce. Reducing CPH without compromising on candidate quality requires a balance of efficient recruitment practices, strong employee engagement, and ongoing evaluation of recruitment processes.
