Cost per hire: what is it and how to calculate the cost of hiring an employee

Cost per hire is a metric that allows a company to calculate the expense of filling a vacant position.

Recruiting new talent can be costly and calculating the necessary budget can be complicated, as different factors, both internal and external, come into play. It is therefore recommended, among other things, that emphasis be placed on pre-employment testing.

Understanding what cost per hire is and knowing how to calculate it  allows you to improve the efficiency of your recruitment process and increase its success rate.

We will explain these and other relevant issues in this article.

What is cost per hire?

Cost per hire (CPH) is the comprehensive budget a company needs to hire new candidates. It includes the external costs of recruitment as well as the internal costs.

It is a metric that allows Human Resources (HR) departments to analyze the efficiency of the recruitment process.

In this sense, factors such as the availability of talent in a specific sector or the company’s employer branding are factors that have a significant impact on costs.

So, when faced with the recurring question of how much it costs to hire someone, the answer is not simple and requires an analysis that you will find in the following points.

What is the cost of bad hire?

If the cost per hire can be high, and can be up to 3 or 4 times the salary of the position offered, the bad hire cost can be much more so because you will not make the investment profitable.

Your company will lose the recruitment and training costs, in addition to having to start recruiting again from scratch, that is, re-devote a budget item and resources that do not advance in other projects.

In this way, a bad hire becomes a recruitment challenge.

You should keep in mind that there are a number of factors that indirectly influence the cost per hire, such as the work environment, employee experience, corporate culture, employee turnover, among others.

How to calculate the cost of hiring an employee?

The cost per hire calculation must take into account internal and external recruitment costs.

The Society of Human Resource Management (SHRM) and the American National Standards Institute (ANSI) have worked to propose a standard formula for calculating cost per hire (CPH):

As you can see, the costs of hiring an employee can be internal -when using existing resources in the company- or external -when using collaborators outside the organization-.

Let’s take a closer look at these two concepts right now. 

Internal recruiting costs

Among the most common internal recruiting costs, we can highlight the following:

• Recruitment process. This includes the time and resources you dedicate to the candidate selection process, publication of the offer, interviews, etc. You must consider whether you are going to select candidates from outside your company or whether you are going to favor internal candidates.
• Onboarding plan. The efficiency of the onboarding plan depends on its adaptation to the company’s objectives as well as to the candidate’s expectations. You must provide him with all the tools he needs, including training and workplace infrastructure, and introduce him to the team. All of this is essential and comes at a cost.
• Employer branding. If the company has a good brand image and takes care of the satisfaction of its employees, it will have access to enthusiastic and highly qualified profiles. Therefore, it is important to invest in this aspect, improving the experience of the selection process, for example.
• Emotional salary. When calculating the cost per hire, it is important to consider the benefits that your company offers to its employees, beyond the salary, such as family reconciliation, medical insurance, sports facilities, etc.

External recruiting costs

External recruiting costs depend on your strategy for attracting new talent. For example, if you opt for outsourcing, i.e. you outsource the detection, recruitment and evaluation of the candidate, you must include their commission in your calculations.

In this case, it is important to remember that you should not disengage from the project, but that you will also have to allocate internal resources to take an active role in the process to ensure its success.

Other external recruiting costs may be the publication of the vacancy offer on specialized platforms, attendance at job fairs, etc. 

Average cost to hire an employee

The average cost per hire in the United States is about $4,700, based on figures published by The Society of Human Resource Management (SHRM).

However, this figure can be as high as $30,000 for executive profiles.

According to the experts consulted, the cost of hiring can be 1.5 times the employee’s salary for a company. 

To this figure must be added the training time during which the person is not fully operational.

Why cost per hire metrics matter?

Calculating the cost per hire allows, as you have been able to discover along these lines, to optimize the process of hiring new talent for your project, reducing costs and optimizing resources.

In turn, this metric is linked to other metrics such as time to fill, which is the time that elapses between a candidate receiving a job offer until he/she accepts it and starts working for the company.

Other impacts may be due to a slow and not very agile hiring process, which may even demotivate the candidate. In this area, artificial intelligence can help you optimize your recruiting process.

In the same vein, Smowltech’s proctoring plans are an innovative and highly effective solution for online assessments and remote monitoring of training processes.

Ask for a free demo so that we can explain the tools we can offer you.