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Lesson #1: How to Calculate Cost Per Hire

To learn how much your company spends (on average) to hire one new employee, we’re going to use this simple formula:

Cost Per Hire = (External Costs + Internal Costs / Total Number of Hires)

To get our Cost Per Hire, we need to add up how much is spent on the following line items (below) over the last year. Then, we divide that number by the total number of people hired during the same exact period. It’s really that easy.

Add up all your costs associated with the following:

  • internal recruiting staff (include the time your hiring managers spend interviewing potential employees)
  • third-party agencies
  • applicant tracking software and screening/interviewing tools
  • company career websites, marketing and content
  • job boards and job-listing services (include LinkedIn, job board ads, advertisements, subscriptions etc.)
  • employee referral programs (include program costs and all fees paid out to employees)
  • college recruiting efforts
  • social media tools and maintenance (include LinkedIn, Facebook, Twitter etc.)
  • all other recruiting-related expenses (reference/background checks and all administrative costs associated with setting on-boarding new employees)

As an example: Let’s assume that all of your associated costs above add up to $300,000 over the last year. And let’s also assume that you hired 50 people over the exact same period. This would mean that your average cost per hire is:

$300,000/50 = $6,000

(Note: total costs are most likely higher because soft costs, and opportunity costs associated with not having the right people on board in the first place, are not included in our equation.)

While we do believe that reducing cost per hire is useful, it’s important to not lose sight of what’s most critical – and to us that is “quality of hire”.

When we focus everything on reducing cost per hire, we put our organizations at greater risk for poor candidate experience and may even hurt our ability to recruit effectively.

Why care about cost per hire at all? It’s a useful metric for when we want to know how and where we are spending on hiring. Knowing our cost per hire helps us to:

  • reduce waste and redundancies in systems, processes and technologies across the talent acquisition function.
  • speed up hiring and improve candidate experiences.
  • and uncover inefficiencies in our recruiting process.

 

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