Organizational hiring has become a very complicated process, one that can be expensive for companies that aren’t getting it right. According to research by the Society for Human Resource Management (SHRM), 15% of all HR-related expenses are due to recruiting costs. At the same time, more than 80% of the world’s employers feel the excessive junk resumes on their job portals affect their quality of hires.
When organizations hire the wrong people, the companies naturally experience immense systemic problems. One of the biggest concerns with recruiting and hiring the wrong candidates are the excessive costs organizations incur when doing so. Understanding Cost per Hire and how to calculate it, can help CEOs and corporate executives understand the effects of these costs on their bottom lines.
What is Cost per Hire (CPH)?
CPH is an important metric that affects the profitability and ROI of an organization. It covers all expenses associated with:
- Finding applicants
- Investment on recruitment tools, software and technologies
- Hiring staff salaries & benefits
- Employee relocation
According to SHRM, the national average CPH in 2016 was $4,425. Averages vary by industry, company and job types. Knowing what the CPH for a particular job is can help organizations make well-informed decisions about their hiring process and reduce hiring costs.
Variables to be considered when calculating CPH
When calculating CPH, managers tend to forget certain variables. Here are four elements that organizations must consider when breaking-down their potential CPH:
- Time to hire
When the organization is in dire need of talent, even a day of delay can have a massive negative impact on the profitability of the organization. This delay also increases the CPH, as more time and money need to be spent to fill the position. In 2016, the average time to fill a position was 36 days.
- Interviews to Offers rate
When the total number of offers remain low despite a higher number of interviews, the organization wastes more resources and efforts on hiring, which ultimately drives up the CPH.
- Quality of hire
This refers to the value new employees bring to the organization in the form of new ideas, higher productivity, leadership skills, and so on. Quality of hire determines whether investing high CPH today will bring benefits to the organization in the future. In 2016, 23% of organizations were measuring quality of hire, and this percentage was growing.
- Employee retention rate
The cost of replacing an employee is much higher than recruiting a new one. Therefore, employee retention rate is important to CPH calculation. A higher retention rate justifies a higher CPH purely because long-term employees help generate higher ROI over a period of years. According to SHRM, in 2016, organizations reported that 17% of their separations were from employees during their first six months on the job. Employees within their first year of employment accounted for 26% of all separations that year.
Formula to calculate CPH
There are three sets of data that organizations need when calculating Cost Per Hire. These are:
- Internal recruiting costs
- External recruiting costs
- Total number of hires
The formula to calculate CPH is:
It’s important to note that the metrics used here are time-bound and role-bound. CPH of a job refers to the cost of hire of one job role, during one recruitment cycle.
What do internal recruiting costs include?
- Salaries, bonuses and OT of recruitment staff.
- Salaries, bonuses and OT of hiring manager.
- Training & development costs of recruitment team.
- Cost of company resources & technologies used during recruitment.
What do external recruiting costs include?
- External hiring agency costs.
- Job board costs.
- Background verification costs.
- Organizational branding & advertising costs.
- Travel expenses for managers/staff.
- Relocation expenses for employees.
- Costs of IT infrastructure
Who should you consider, when calculating a total number of hires?
- Applicants hired through a formal hiring process.
- Existing employees transferred to new teams.
- Newly-onboarded contract workers and temps on a third-party payroll.
- Temps promoted to full-time workers.
- Employees obtained through M&A and company partnerships.
Get the right candidate at the first go
One of the biggest advantages of calculating CPH correctly is that it will help you identify all the activities that result in your hiring people ill-fitted for your organization. Ultimately, CPH also helps streamline the hiring process and helps managers hire the right people.
Hiring a person who is a perfect-fit for your organization and the job role helps:
- Reduce time spent on application review.
- Lower recruitment & hiring costs.
- Prevent loss of good talent.
- Reduce training costs.
- Increase retention rate.
- Avoid re-hiring costs.
- Improve team morale and team dynamics.
- Increase productivity.
- Improve the brand image of the organization.
- Increase protection of confidential organizational data.
- Improve the top & bottom line.
- Increase and quicken ROI.
Three easy ways to reduce CPH
Calculating CPH isn’t alone enough for organizational success. Hiring managers need to reduce their CPH, in order to truly increase the profitability of the organization. Here are five ways you can do this:
- Nurture a talent community within the organization. Organizations can develop a pool of existing employees who have shown interest in taking up different roles in the organization. Engaging and nurturing them can help you keep-ready a group of candidates for the new job.
- Seek employee referrals. Administering employee referral programs where your staff will be rewarded for every hire, will encourage your employees to recommend candidates who are talented and trustworthy. This will reduce your dependence on other more expensive sources of hiring.
- Outsource your hiring process. Organizations can also choose to outsource their recruitment and hiring process to external vendors like Alluvion, who are specialists in the field. This will bring them immense expertise & state-of-the-art technology, a higher reach and a higher number of validated candidates. By hiring an external company, organizations don’t need to spend money on replicating the facilities needed for hiring internally, thereby creating tremendous savings.