Hiring is expensive, but just how expensive is it? Knowing exactly how much your hiring efforts cost isn’t just important for budgeting purposes – it also provides a benchmark you can use to work towards lowering your overall costs. One way to evaluate hiring expenses in a more digestible way is by breaking it out into the cost per hire – the average amount of money spent to make a single hire.
How to Calculate Cost Per Hire
Calculating cost per hire isn’t exactly straightforward. In it’s most basic form, cost per hire can be calculated by simply dividing your total hiring costs by the number of hires made. This can be calculated within any time period, but it is typically calculated on an annual basis.
While the equation is simple enough, what you decide to include in the numerator requires some judgment calls. Your “total hiring costs” should essentially include any expense relating to the hiring process, such as:
- Salaries of HR, hiring managers, or recruiters: Often the largest expense, this includes salaries of internal employees who are tasked with the hiring process. If an employee’s entire role involves hiring, then you can easily include that person’s whole salary. But if someone spends only part of their time on hiring-related tasks, then you should include some percentage of their salary based on the estimated amount of time they spend on these tasks per year.
- External recruiting expenses: This includes any expenses paid to outside recruiters.
- Job board fees: This includes any fees to post your jobs on job boards.
- Hiring technology: If you use an ATS or a pre-employment assessment service, these should be included in your total hiring costs.
- Other screening costs: These might include background checks or drug screenings.
- Employer branding costs: Some of these include the costs to maintain profiles on employer branding sites such as Glassdoor or the Muse, the costs associated with maintaining your own career site, and any other recruiting outreach efforts your company may perform.
- Referral programs: If your company offers referral bonuses to current employees who recommend candidates, you should factor in the cost of this as well.
Once you have an estimate for each of these hiring costs, you just need to add them up for the year, and divide by the total number of hires within that period.
What’s a “Good” Cost Per Hire?
According to data from SHRM, the average cost per hire for a company is $4,129. While this is a useful benchmark, your costs might vary based on company size or industry. For example, smaller companies may have a higher cost per hire ratio because they’ll make fewer hires per year, and they don’t have as many resources as larger organizations.
How to Reduce Cost Per Hire
Most companies strive to drive down costs, but not at the expense of performance. If driving down the cost per hire means reducing your quality of hire, this trade-off may not be worth it. When calculating cost per hire, you’ll often find that the largest line item is the salaries of your employees – the time that it takes to hire is very expensive. This is why one of the best ways to reduce cost per hire is by adopting cost-saving strategies and tools that allow you to maintain (or even improve!) your other hiring metrics. Interestingly enough, some of these tactics might involve spending a little more on technology to improve your hiring efficiency.
One time-saving solution is an Applicant-Tracking System (ATS), which help you keep track of your applicants and manage your candidate pipelines. Some of these platforms can also help you automate some of the manual tasks that take up so much time, such as candidate communications, interview scheduling, and moving candidates down the hiring funnel.
Pre-employment assessments are another cost-saving tool, reducing time to hire by identifying the key abilities and skills a candidate needs to succeed in a particular role. Pre-employment tests are such a useful filtering and screening tool because they are exceptionally predictive of job performance. Cognitive aptitude tests in particular are twice as predictive as job interviews, three times as predictive as work experience, and four times as predictive as education level. By using testing early in the process, companies can efficiently prioritize which candidates they want to move to the next level of the hiring process.
Ultimately, any tactic you use to reduce cost per hire should also help, not harm, your overall hiring goals.