Cost Per Hire: Why You Should Replace it in 2020

Table of Contents

• What is cost per hire?
• How to calculate cost per hire
• Internal recruiting costs
• External recruiting costs
• Where cost per hire falls short
• Hiring budget
• Why you should replace cost per hire

What is cost per hire?

Cost per hire is a recruitment metric that measures the total amount of money invested divided by the number of hires. For example, if you want to hire 200 people in a given year, and your average cost per hire is $4,500, then you can expect to spend a total of $900,000. Tracking this metric allows you to compare costs year after year to see if there are any significant changes.

Recruitment is at the forefront of every company's success, yet we increasingly see a push to reduce the amount of money spent per hire. The most common way companies measure this metric is through a recruitment metric called cost per hire. Cost per hire is a metric that takes into consideration a myriad of costs including advertising, software, relocation expenses and more.

How to calculate cost per hire

• Cost per hire = Total recruitment cost / Total number of hires = Total internal cost + Total external cost / Total number of hires

Cost per hire can be divided by internal and external cost. By identifying and calculating all costs, you can calculate the total recruitment cost.

Internal recruiting costs

Internal recruiting costs are any expenses relating to the internal employees of a company and the costs of the recruiting process.

• Employee referral bonuses (cash or prizes)
• Recruiter salaries
• Interview costs (The number of hours times hourly salary of involved employees)

External recruiting costs

External recruiting costs are any expenses related to recruiting that do not fall under internal recruitment costs.

• Advertising costs (Job boards, PPC)
• Recruiting software
• Recruiting events
• Non-internal recruiter fees (Agency fees)

If a candidate requires a flight for an interview, or money for relocation then this should also be included in external recruiting costs.

The average cost per hire hovers around $4,000.

Where cost per hire falls short

Cost per hire provides some actionable insights by projecting how much your company will likely spend to acquire a new hire, but it fails to take into account the all-encompassing hiring process behind acquiring top talent. To be on the forefront of talent acquisition, you have to consider all the costs associated with recruitment as an investment in your company.

Hiring budget

Hiring budget is the sum total of recruiting costs associated with hiring new candidates, as a percentage of the total salary of the new employees or new hire payroll. Hiring budget allows a company to take into account the cost of recruiting in relation to the value of the employee (salary). Hiring budget includes all recruiting costs both internal and external. With a hiring budget, you can tailor your recruiting investment to the type of role for which you’re trying to hire.

Why you should replace cost per hire

The reality is that cost per hire is a metric that falls short in producing actionable insights. Knowing your cost per hire cannot tell you if you are investing enough in top talent. Cost per hire also does not take into account the simple fact that the investment needed to fill various roles will always vary depending on the seniority, scarcity, and readiness of the existing talent pool.

Tracking your company’s recruitment process with the right metrics will help you hire top talent, scale, and maximize your ROI. It’s key to understand cost per hire and where it falls short so that you can transition your team to the current industry standard in recruitment metrics, like SmartRecruiters' Net Hiring Score. Properly measuring your hiring budget will allow you to accurately forecast acquisition spending for a diverse number of positions and talent pools.