Managing hiring costs is one of the most important duties for HR professionals. You want to find the best talent possible, but you also have an incentive to do so quickly, as the longer it takes to fill a role, the more it costs the organization. Whether you’re building an entirely new department from scratch or hiring your first employee, costs can quickly add up when your company is growing, which is why it’s important to gather and analyze hiring data frequently.
One of the most important HR metrics for human resource professionals is cost per hire (CPH). Here, we break down what this metric means, why it’s important to understand, how to calculate it, and some basics on how to track it..
Definition of cost per hire (CPH)
Cost per hire — also commonly known as CPH — refers to the complete cost of recruiting and successfully hiring a new employee. This includes both internal and external recruitment costs, like advertising the role you need to fill, finding a candidate, and even the onboarding process that the new hire experiences.
Importance of cost per hire (CPH) in recruitment
Simply put, CPH helps to assess the effectiveness of a company’s hiring strategy. An HR team that properly uses CPH can reap a number of benefits:
- Budgeting: Understanding CPH companies to get the big picture on how to appropriately allocate resources and manage recruitment expenses.
- Identifying improvement areas: CPH can help identify which parts of the hiring process are most costly and which recruitment methods are most successful in attracting high-quality job seekers.
- Benchmarking: HR teams can gauge their CPH against competitors to determine whether they’re overspending on talent acquisition or coming in under budget.
- Improving candidate experience: The hiring and onboarding processes can be tedious for candidates and new employees, and a high CPH may help eliminate bottlenecks.
CPH is a flexible metric, and you can calculate it for a variety of different categories, such as by department, job position, source of hire, or leadership level. This allows you to use CPH to evaluate many different aspects of your business.
Now that we better understand what CPH is and why employers should be familiar with it, let’s find out more about what goes into it.
Components of CPH
Cost per hire is an all-encompassing metric covering the costs associated with hiring for a specific role. This includes both internal recruitment costs and external ones.
Internal recruitment costs
Some of the most common internal recruitment costs include:
- Salaries for internal HR staff. These can include productivity loss when recruiters are focused on hiring for a role and not on other responsibilities (plus non-HR staff who participate)
- HR software costs for applicant tracking systems, assessment and background check tools, and other recruitment software
- Advertising costs for job boards, banners, and other promotional materials
- Event costs for hiring expos, job fairs, and other recruitment events
- Travel costs for recruiters to attend events
- Onboarding costs, including any necessary hiring workshops, webinars, or even promotional items such as branded company promotional items like clothing and coffee mugs
- Referral programs for employees who successfully refer a new hire
- Costs of designing and developing talent programs
Some of these costs are fixed and easy to calculate within a specific timeframe. Others, however, are more opaque and may require chasing down some data.
External recruitment costs
Some of the most common external costs include:
- Agency fees paid to staffing agencies or external recruiters
- Event costs for external recruiters
- Travel costs for external recruiters
- Consultant and legal fees associated with recruiting for specific roles
Most external costs are easy to calculate since they should be itemized on any invoices you receive. When you get your bill from external agencies or recruiters, you’ll know exactly how much you paid within a month or to hire a specific role or roles.
Moving on, let’s find out more about what to know about the math that goes into hiring a new employee.
Example calculation
Let’s take a look at an example. Your company, Widgets Inc., is recruiting to get a team of top-notch product engineers to work on a new mobile app. After two months, you’ve finally hired all three (congrats!).
To calculate the average cost per hire, you should gather all of the related recruitment expenses from this two-month period and divide them by three. We’ll use these numbers, calculating the total cost of the two-month hiring period as we go:
Internal recruitment costs:
- HR team salary: $10,000/month x 2 = $20,000
- ATS software: $25/month x 2 = $50
- Background software: $25/month x 2 = $50
- Recruitment software: $25/month x 2 = $50
- Job board posting fees: $5 x 3 listings x 2 months = $30
- Job fair: $150
- Travel to job fair: $500
- Onboarding: 10 hours x 3 employees x $75/hour = $2,250
- Productivity loss from interview process: 30 hours x $100/hour average employee salary = $3,000
Notice that some of these calculations involve a little extra number-crunching, plus some rounding and estimating.
For instance, each of the three new employees may have actually gotten some work done during their onboarding process, but for the sake of this scenario, it’s simpler to assume that each employee devoted their complete attention to onboarding. (Some companies may have a much shorter onboarding process than ten hours in the first week, too.) Likewise, the hourly wages of employees conducting interviews will vary; we used $100/hour as an average salary.
External recruitment costs:
- Agency fees: $250/month x 2 = $500
- Travel to job fair: $500
- Legal fees for consulting about hiring an international employee: $200
External costs tend to be easier to calculate since they’ll be billed to you by external partners. In this example, we’ve assumed that the company purchased a booth at a job fair and sent both an internal and external recruiter to the event, paying travel costs for both.
Final CPH
- After adding up all of the internal costs, we are at: $26,080.
- All of the external costs add up to $1,200.
- $26,080 + $1,200 = $27,280.
- Finally, we’ll divide the total costs by the number of new hires.
- And drum roll, please! $27,280 / 3 employees = $9,093.33 is the CPH.
Analyzing and tracking CPH
The above example is for hiring highly skilled roles that may take a long time to hire. As such, the CPH may ultimately be on the high side. This is why it’s beneficial to segment your CPH by department because different roles may be less involved — and less expensive to fill.
For example, an entry-level sales role is likely much simpler to fill than a senior product manager role. There are simply far more entry-level employees in the talent pool than senior-level employees.
This is why it makes sense to put tracking CPH on your to-do list. The average cost per hire will range between roles, departments, levels, and possibly even could be affected by different seasons. By gathering detailed data, you’ll put your organization in a position to know the best times to hire certain roles and identify opportunities to save the company money.
Keep track of cost per hire helps with hiring over the long run
Tracking recruitment costs helps HR teams optimize their budgets and the time it takes to attract top talent. This data can also highlight opportunities to enhance the onboarding process, leading to quicker employee ramp-up and increased referrals for open positions from satisfied team members. OnPay’s comprehensive HR tools — from PTO management to org charts — help streamline these processes and support your business goals as your organization grows.
