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What Is Cost per Hire and Why Is it Important?

Discover why understanding your CPH data is the secret sauce to on-budget recruitment strategies and control your cost per hire.

What Exactly is Cost per Hire?

Cost per hire (aka: CPH), is a metric organizations use to calculate the average cost associated with hiring a new employee.

It encompasses various expenses incurred throughout the recruitment process, such as advertising, recruiter fees, candidate assessments, and administrative costs. To calculate your cost per hire, use this simple formula:

  1. Identify the total of internal expenses such as recruiter salaries, employee referral bonuses, interview costs, infrastructure costs, etc.
  2. Now idenitfy the total of external recruiting costs. This could be what you spend on career fairs, job board advertising costs, agency fees, recruiting software costs, etc.
  3. Add your internal and external recruiting costs together.
  4. Now divide that sum by the total number of hires in a given time frame and you have your cost per hire.

In this post, we’ll explore the importance of CPH data and most importantly, how you can decrease your cost per hire.

Why You Should Care

Recruitment isn’t solely about discovering top candidates; it also involves effectively managing the expenses tied to the hiring process.

The latest benchmark data from the Society for Human Resource Management (SHRM) states that the average cost per hire is around $4.7k1. However, experts suggested the cost could reach up to three or four times a position’s salary, based on the expenses considered.

This means when you are recruiting for a position offering a $60k salary, you could potentially allocate $180k or beyond to complete the hiring process for that role.

Understanding your CPH data is vital for organizations as it provides insights into the efficiency and effectiveness of their recruitment efforts. By analyzing the cost of hiring, businesses can identify areas where costs can be optimized, streamline their hiring processes, and allocate resources more efficiently. Moreover, tracking these costs allows organizations to make informed decisions regarding recruitment strategies, budget allocation, and overall workforce planning, ultimately contributing to improved organizational performance and profitability.

Why is Understanding Your Cost Per Hire Data Important?

Cost per hire is a crucial KPI when strategizing your recruitment budget. By tracking the actual expenses invested in candidate attraction, you gain clarity on the effectiveness of your talent acquisition strategy and the strength of your employer brand. This measurement helps you gauge the financial investment in recruiting, facilitating the identification of avenues to reduce your cost per hire more effectively.

Understanding your company’s cost of hiring efforts is important for various reasons:

  1. Return on investment (ROI) assessment: CPH calculation empowers you to assess the ROI of your recruitment endeavors. By juxtaposing the hiring costs with the value and productivity contributed by new employees to the organization, you can gauge the effectiveness of your recruitment strategies. This evaluation allows for data-driven decision-making to enhance your overall hiring outcomes.
  2. Financial planning and budgeting: Grasping the CPH enables precise estimation and allocation of resources for your recruitment endeavors. This understanding facilitates more effective planning of your hiring budget by offering insights into the expenses associated with bringing new employees on board.
  3. Cost optimization: Keeping track of and examining the CPH allows you to pinpoint chances for refining recruitment expenses. By recognizing high-cost segments and inefficiencies within the hiring process, you can deploy strategies to trim costs and enhance your overall profitability.

Simplifying the hiring process through streamlined procedures and leveraging technology such as applicant tracking systems (ATS) and video interviews can significantly reduce the time and resources required for candidate screening and selection. By embracing efficient methods, companies not only mitigate expenses associated with recruitment but also enhance the overall effectiveness of their hiring strategies, enabling them to attract top talent while maximizing operational efficiency and profitability in the long run.

How to Lower Your Cost per Hire

Monitoring your spending on talent acquisition endeavors helps gauge individual and cumulative ROI. Leadline offers you the quickest and most intelligent candidate-sourcing solutions to address the current recruiting obstacles effectively.

With Leadline’s Ad Spend tracker, you can monitor spending activities per channel used for advertising. Paired with your lead sourcing metrics, Leadline offers your team comprehensive visibility into the top-performing advertising channels. This allows adjustments to be made quickly to reduce spending in underperforming channels and gain deeper insights into the actual cost per hire for acquiring new employees.

Leadline’s status tracking and customizable field functionalities enable real-time assessment of your recruitment team’s capacity and candidate progression monitoring. This includes gaining insights into average time-to-fill and submissions-per-hire, which help scale your recruitment team’s productivity levels effectively.

Let’s Look Into a Sample Scenario

Imagine you are given a recruitment budget of $5,000. Of this total, you spend the money across three channels: $4k on Indeed, $500 on attendance and material fees for a local job fair, and $500 on an employee referral program.

Let’s assume the Indeed campaign results in 250 applicants, the job fair lands you 25 applicants, and the referral program gets you 10 applicants. Good news, for $5,000, you got 285 applicants! At face value, Indeed is the best option because it got you almost 90% of your candidates. But this is where CPH comes into play.

First off, think about how much human effort (cost) is required to review 250 applications. On top of that, you might only hire 3 out of the 250 (1%). Of your job fair candidates, you might hire 2 out of the 25 (8%), and of your referrals, you might hire 3 out of 10 (30%). When you calculate the cost associated with each hire, you will see that Indeed comes in at $1,334 ($4,000/3), your job fair comes in at $250 ($500/2), and your referral program comes in at $166 ($500/3).

1 Does not include costs of interviews, recruiter or hiring manager salaries, agency fees, recruiting software, etc.
IndeedJob FairReferral ProgramResults
Recruitment Budget1$4,000$500$500$5,000 Total Spent
Applicants2502510285 Total Applicants
Hires3238 Total Hires
Cost per Hire$1,334$250$166$625 (cumulative)

If you tell your boss, “We could spend $1,000 and get five hires, or we could spend $4,000 and hire three people,” – your boss is going to choose option A every time. This is where having insights into your cost per hire is critical. Using this sample data, you might want to place a strategic bet next year to double down on job fair and referral program resources, and the result is that you might double your amount of hires and reduce your overall costs by 60%. This is the power of CPH.

Enhancing Efficiency and Profitability

Cost per hire is critical in understanding the financial implications of the recruitment process. It encompasses various expenses incurred in attracting and hiring new employees, making it essential for organizations to track and optimize. Lowering CPH contributes to enhancing the bottom line and streamlining recruitment processes, ultimately improving operational efficiency and profitability.

Leadline offers innovative solutions to enable businesses to monitor spending activities and optimize advertising channels effectively. By leveraging Leadline, organizations can gain valuable insights, make informed decisions, and ultimately reduce their cost per hire while attracting top talent efficiently.

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