Hiring a new employee comes with many costs. The cost of acquiring a new employee, also known as “Cost Per Hire“, can be high when you do not know if they will pay you back for their services. While some of the costs associated with hiring new employees are pretty straightforward, others can be hidden costs that may affect your company indirectly.
Cost-per-hire (CPH) is one of the most fascinating recruiting measures in the 21st century. While it is easy to grasp, it can prove difficult to calculate. In this article, we will examine its definition and formula. How can you calculate cost-per-hire and what is its significance as a recruiting measure?
In this Article:
What Is the Cost Per Hire (CPH)
Cost per hire is an employee recruitment metric by which the cost of hire is determined. These expenses are primarily expenses for recruiting and sourcing advertisements, onboarding bonuses and referral bonuses, etc. This will help you know the effectiveness of a recruitment process for a particular job position or sector. The analysis of departments in each quarter is useful for identifying the most recent trends. CPH varies from business owner to employee.
How Do You Measure Cost Per Hire
Calculating your CPH can seem like a daunting task, but it doesn’t have to be. By using a simple formula, you can quickly and easily calculate this important metric. To calculate the cost per hire, divide the cost of recruiting by the number of new hires. The cost of recruiting includes all costs associated with filling a vacant position, such as advertising, job board postings, agency fees, candidate travel expenses, and background check fees.
What is the Formula for Cost Per Hire
The cost-per-hire formula is:
(Total recruiting costs) / (Number of hires)
Total recruiting costs include all the money you spend on recruiting, from advertising to job board fees to candidate screening and background checks.
The number of hires is simply the number of people you’ve hired in a given period. So, if you spent $1000 on recruiting in January and made 10 hires, your cost per hire would be $100.
Other methods include dividing the cost of advertising by the number of new hires or dividing the cost of training by the number of new hires.
Internal Costs
Internal costs are all the costs that the company has spent from within to support the new hire. These include the time cost of the employees working on the hiring process, internal recruitment, advertising, recruitment agency fees, and onboarding cost
External Costs
External costs are all the costs that the company has to outsource to support the new hire, such as candidate travel expenses, background check fees, and referral bonuses.
Total Number of Hires
The total number of hires refers to the number of new employees hired during a specific period, typically a year.
Does CPH Work?
Yes, cost per hire works because it provides a way to measure the cost-effectiveness of your recruiting efforts. If your cost per hire is too high, it may be time to reevaluate your recruiting strategy.
Why is Cost Per Hire An Important Metric to Track?
Cost per hire is an important metric to track because it can help you determine the cost-effectiveness of your recruiting efforts. Costs for acquiring an employee can be extremely high. If you can estimate the cost to hire you will make the best possible decision in the future. This choice leads to improved efficiency and precise budget preparation. This benefit allows you to increase productivity and increase profitability in your organization.
What is the Cost of a Bad Hire?
A bad hire is an employee who is not a good fit for a position or company. A bad hire can cost a company time and money in the form of training, lost productivity and turnover. The cost of a bad hire can be difficult to quantify, but some estimates put the cost at upwards of three times the annual salary of the position.
The best way to avoid the cost of a bad hire is to screen and select candidates who are a good fit for the position and company.
How Can I Reduce My Cost Per Hire?
When it comes to reducing your cost per hire, there are several options you can utilize. Social media, employee referral programs, recruitment software, and staffing agencies are some of the platforms that can help you to reduce your cost per hire and find the best candidates for your open positions.
Use social media to recruit: Social media is a great way to reach a large pool of candidates quickly and efficiently. Utilize platforms such as LinkedIn, Twitter, and Facebook to post job openings and screen candidates.
Use employee referral programs: Employee referral programs can be a great way to reduce your cost per hire. Ask your employees to refer candidates they know who would be a good fit for the position. Employee referrals typically result in higher-quality candidates and lower turnover rates.
Use recruitment software: Recruitment software can help you automate and streamline the recruiting process. This can save you time and money by reducing the need for manual processes and increasing efficiency.
Partner with a staffing agency: Staffing agencies can be a great resource for finding quality candidates. They typically have a large pool of candidates to choose from and can help you find the right fit for your position.
Review your hiring process: Look at your current hiring process and see where you can make improvements. Are there any steps that are unnecessary or time-consuming? Is there anything you can do to streamline the process? Reviewing your hiring process can help you reduce your CPH.
How to Calculate Cost Per Hire in 4 Easy Steps
The costs of hiring refer to what you pay for services. It can become difficult and tedious if an employee works different jobs. In most cases, this cost varies over time (e.g. month/year). Calculated costs per employee are based on this formula:
Cost of (advertising + cost of recruitment agency + other) divided by the number of new hires. The cost of advertising is how you will market the job, while the cost of the recruitment agency is the professional fees associated with using their services. Other costs can include onboarding bonuses and referral bonuses.
1st step: Determine all the costs associated with advertising and recruiting.
2nd step: Add up all the costs associated with advertising, recruiting, and any other costs related to hiring.
3rd step: Divide the total cost by the number of new hires.
4th step: Use the cost per hire formula to calculate the cost of each new hire.
Remember: CHP = (internal costs + external costs) / total number of hires. Internal costs are the salaries of employees who work in the HR department. External costs are all other expenses related to recruiting, such as advertising, job board postings, and agency fees. The total number of hires is the number of new employees hired during the period in question.
Here is an example:
Internal costs = $5,000
External costs = $10,000
Total number of hires = 100
Cost per hire = ($5,000 + $10,000) / 100 = $150
5 Tips for Leveraging Cost Per Hire
Once you calculate your CPH then you have to ensure the metric is being used in your recruitment processes. If the recruitment metrics are to work, ensure they implement these steps as soon as possible to improve your recruitment process and save money.
1. Compare the costs of different recruitment strategies.
2. Benchmark your company against others.
3. Identify areas where you may save money.
4. Determine whether your current recruiting efforts are cost-effective.
5. Choose the most effective recruitment strategy for your needs.
Cost Per Hire – Other Metrics
When it comes to hiring costs, two different subcategories increase recruitment efficiency, reduce costs per employee, and increase the quality of the hire.
Cost Per Hire Comparable (CPHC)
You can use the same method used for CPH to calculate these costs per employee, although the Cost Per Hire Comparable (CPHC) uses different information. CPHC uses only the charges that would have been paid even if the employee had not been hired. Cost per hire comparable also focuses on specificity. To calculate CPHC, you’ll need to know:
- The number of job openings in a given period.
- The number of people hired during that period.
- The cost of the hiring process for each position.
- Cost of the interview process for each position.
Total recruiting cost / Number of hires = Cost per hire comparable
For example, if it cost your company $1,000 to fill a job opening, and you made 10 hires during the period covered by the report, your cost per hire comparable would be $100.
As with CPH, you can use cost-per-hire comparables to benchmark your company against others, identify areas where you may save money, and determine whether your current recruiting efforts are cost-effective.
Cost Per Application (CPA)
The Cost Per Application (CPA) metric is the number of job applications divided by the cost of recruiting. This metric allows you to see how much it costs your company to receive an application for a job opening. To calculate CPA, you’ll need to know:
- The number of job openings in a given period.
- The number of people hired during that period.
- The cost of the hiring process for each position.
- Cost of the interview process for each position.
Total recruiting cost / Number of job applications = Cost per application
For example, if it cost your company $1,000 to fill a job opening, and you received 100 applications for the position, your cost per application would be $10.
Cost per application is a useful metric for benchmarking your company against others and identifying areas where you may save money.
Cost Per Interview (CPI)
The Cost Per Interview (CPI) metric is the number of job interviews divided by the cost of recruiting. This metric allows you to see how much it costs your company to interview for a job opening. To calculate CPI, you’ll need to know:
- The number of job openings in a given period.
- The number of people hired during that period.
- The cost of the hiring process for each position.
- Cost of the interview process for each position.
Total recruiting cost / Number of interviews = Cost per interview
For example, if it cost your company $1,000 to fill a job opening, and you conducted 10 interviews for the position, your cost per interview would be $100.
Cost per interview is a useful metric for benchmarking your company against others and identifying areas where you may save money.
Recruiting Cost Rate / Recruitment Cost Ratio
It calculates the costs to acquire new talent in the industry. The recruit cost ratio (RCR) is the amount spent on hiring, keeping, and training a new employee. How do you calculate recruitment cost rates?
You can determine the ratio by taking the recruitment cost and dividing it by the number of new hires in a specified period. This recruitment metric helps you understand how effective your recruitment efforts are. The recruitment cost rate (RCR) is a simple way to compare the cost of recruiting across different companies and industries. This recruitment metric can help you understand how effective your recruitment efforts are.
Cost Per Hire vs Cost Per Employee
Two types of cost are often confused: cost per hire (CPH) and cost per employee (CPE). Cost Per Hire includes all the costs associated with filling a vacant position, from advertising to onboarding. On the other hand, Cost Per Employee looks at the total cost of employing someone throughout their tenure with the company.
Cost per employee includes:
•Cost per hire.
•Salary.
•Benefits.
•Training.
•Development.
Cost per employee is a useful metric for benchmarking your company against others and identifying areas where you may save money.
A word from SublimePeople
Following the above steps, will assist you in making the best possible hiring decisions in the future. You can estimate the cost to hire leading to improved efficiency, precise budget preparation, increased productivity, and profitability in an organization.
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