In recent articles, we’ve highlighted the high cost of hiring and discussed the importance of determining the ROI for your company’s investment in recruitment. Today, we’re highlighting Cost Per Hire (CPH), one of the most important metrics for calculating your ROI, controlling your hiring costs, and measuring both the efficiency and effectiveness of your hiring process.
Cost Per Hire (CPH) can help your organization pinpoint how much you’re spending to fill individual positions and provide a way of understanding precisely what it costs to keep your company fully staffed. Understanding this figure can provide insight into the proficiency of your company’s hiring practices and point the way to more optimal and cost-effective recruitment strategies.
However, today’s recruitment and hiring landscape is complex; its terrain varied. From social media and online job forum posting to tech-powered training and onboarding, the path between first contact and long-term employment may be long and winding. And for employers, it can be costly. The first step to reining in costs is understanding them. This underscores the value of knowing your company’s CPH.
In the discussion that follows, we’ll highlight the importance of calculating CPH, we’ll provide detailed instructions on how to determine your organization’s CPH, and we’ll provide tips for how you can use this calculator to improve your organization’s recruitment outcomes.
What Is Cost Per Hire (CPH)?
First, let’s take a moment to define this metric. Cost Per Hire refers to the total cost an organization incurs to hire a single new employee. This cost includes everything involved in the hiring process from ad placement, vetting, and interviewing to the onboarding and training required to bring each new employee into the organization.
The CPH metric is commonly used by HR departments, recruiters and hiring officers to evaluate the efficiency of existing recruiting strategies and to determine whether there are opportunities for cost savings.
Calculating Cost Per Hire (CPH)
Calculating CPH requires you to first sum up the variety of expenses associated with the hiring process including the expenses that go into recruiting, screening, onboarding, and more. Typically, CPH calculations will be based on the total sum spent on hiring in a given period, such as a fiscal quarter or year, divided by the total number of hires made during that period.
The resulting CPH formula looks like this:
- Cost Per Hire (CPH)=Total Recruiting Costs/Total Number of Hires
Before we can view this formula in action, let’s take a closer look at how to calculate the variables used in this equation:
Calculating your Total Recruiting Costs
Total recruiting cost is a figure that should include both the direct and indirect costs that your business incurs during the hiring process. Naturally, it may be easier to quantify some of these costs than others. For instance, the costs for placing job postings may be fairly straightforward, whereas the compensation to HR employees for the hours spent on recruitment and hiring may be less immediately quantifiable.
That said, generally speaking, the costs of recruiting and hiring typically fall into the following categories:
- Direct Costs such as:
- Advertising and job postings including the costs for posting job ads on platforms like LinkedIn, Indeed, or on niche industry job boards
- In-house recruiter salaries including compensation, bonuses, and incentives
- Staffing agency fees including commissions paid to external recruiters that help to source and place candidates
- Software install and licensing fees for the Applicant Tracking Systems (ATS) typically used to manage applications, track candidates, and streamline the hiring process
- Background check, drug testing, and pre-employment assessment fees
- Interviewing expenses including the costs related to candidate travel, meals, venue expenses, etc.
- Indirect Costs such as:
- Job board subscription fees for platforms like LinkedIn Recruiter and ZipRecruiter
- HR team salaries including compensation for the amount of time spent by internal staff and managers on interviews and other aspects of the candidate screening process
- Onboarding costs including the expenses associated with new hire orientation, training, and setup for access to company software, networks and IT equipment
- Training costs including the personnel salaries, materials, and facilities used to facilitate new employee training
- Broader job marketing costs including investments in employer branding campaigns, social media ads, and recruitment videos
Clearly, there are a lot of stages in the hiring process and a lot of expenses that go along with each of these stages. In order to determine your actual cost per hire, you will need to track the costs outlined above.
Calculating Your Cost Per Hire
For the purposes of our example, we’ll take just a few of the costs outlined above into consideration. Using a single quarter of the year as the theoretical duration, let’s assume that your company made the following expenditures on hiring:
- $20,000 on job ads and postings
- $25,000 on salaries and commissions for internal recruiters
- $9,000 on fees for external agencies
- $6,000 on background checks, drug testing, and cognitive assessment
- $9,000 on onboarding and training
Based on these figures, your total cost for recruitment and hiring during the quarter in question was $69,000
Now, let’s assume that your organization hired 17 new employees during this quarter. In this scenario, you would run the following calculation to determine your company’s CPH:
- CPH=Total Recruiting Cost ($69,000)/Total Number of Hires (17)
- 69,000/17=$4058
- CPH=$4058
- This means that your total Cost Per Hire for the duration in question was $4058.
- CPH=$4058
- 69,000/17=$4058
Why Cost Per Hire Matters
So now that you know your cost per hire, what can you do with this information? Understanding what your company spends per new hire:
- Allows you to control costs by illuminating the costliest aspects of your hiring spend
- Helps you prioritize investments in areas of the hiring process that generate the best ROI
- Gives you a basis for measuring your hiring costs against industry benchmarks
- Lets you compare hiring costs across different departments, positions, or regions
- Highlights inefficiencies in your recruitment process and helps illuminate opportunities for improvement
Using Cost Per Hire to Improve Hiring Outcomes
This last benefit is particularly important. Once you’ve calculated your CPH, you can use this metric as a way of identifying opportunities for improvement in your hiring process. This is because CPH makes it possible to:
- Identify costly hiring channels, reassess their effectiveness, and shift focus to more cost-effective sources
- Assess the quality of your hires alongside your cost per hire calculation, ensuring that there is balance between cost savings and the pursuit of high quality candidates
- Optimize onboarding by automating repetitive steps, removing bureaucratic inefficiencies, and deploying digital training technology
- Improve time-to-hire by streamlining your hiring process with better pre-employment assessments
- Refine your hiring team’s performance by enhancing pre-screening methods, reducing the time spent on administrative tests, and establishing a structured interview process
Using pre-employment assessments to improve your cost per hire
At Success Portraits, we’ve created a powerful pre-screening tool that we believe can add efficiency and cost-effectiveness to the hiring and recruitment process. Our Success Portraits Personality Test (SPPT) lets you evaluate prospective candidates on 19 distinct personality traits including Cooperation, Creativity, Vision, and Self Regulation.
When used alongside other proven assessment tools and credentials, the SPPT can accelerate the screening process while helping you form a more complete picture of each prospective employee. And by helping to streamline the process of vetting candidates, it could be an effective strategy for improving your company’s cost per hire.