Cost to Hire

What is Cost to Hire?

Measuring cost to hire can be useful for organizations as it can help them understand the financial impact of their recruitment and hiring efforts, and identify areas where they can reduce costs. 

An organization may find that using a recruitment agency is more cost-effective than advertising and promoting job openings internally or vice versa. By understanding their cost to hire, organizations can make informed decisions about how to allocate their recruitment and hiring budgets and optimize their efforts to attract and retain top talent.

Defining Cost to Hire

Cost to hire is the total amount of money an organization spends on recruitment and hiring efforts for a new employee. It can include a wide range of expenses, including advertising and promotion costs, recruiting agency fees, and onboarding expenses. It can also include indirect costs, such as the time and resources invested by existing staff in the recruitment and hiring process.

The cost to hire a new employee can vary significantly depending on a range of factors, including the type of job, the level of experience and expertise required, and the location of the position. According to the Society for Human Resource Management (SHRM), the average cost to hire a new employee is around $4,129. However, this can vary significantly depending on the specific circumstances of the hire.

For example, the cost to hire a highly skilled or specialized employee may be higher, as the organization may need to offer a higher salary or more generous benefits package to attract top candidates. Similarly, the cost to hire in a high-demand job market or in a location with a high cost of living may also be higher. On the other hand, the cost to hire for an entry-level or low-skilled position may be lower.

How to Calculate Cost to Hire?

The standard formula for cost to hire is as follows:

Cost to hire = (internal recruiting costs + external recruiting costs)total number of hires

Internal costs are expenses that are directly related to the recruitment and hiring of a new employee and that are incurred by the organization. These could include advertising and promotion costs, onboarding expenses, such as training or orientation materials, and the time and resources invested by existing staff in the recruitment and hiring process.

External costs are expenses that are incurred by the organization as a result of the recruitment and hiring process, but that are not directly related to the recruitment and hiring of a new employee. These could include recruiting agency fees or temporary staffing costs incurred as a result of the open position.

It's important for organizations to consider both internal and external costs when calculating the cost to hire, as both types of costs can have a significant impact on the overall cost of the recruitment and hiring process. By understanding and managing both internal and external costs, organizations can optimize their recruitment and hiring efforts and reduce their cost of hiring.

Additional ways to calculate the cost to hire:

Identify all direct costs

Direct costs are expenses that are directly related to the recruitment and hiring of a new employee. These could include advertising and promotion costs, recruiting agency fees, and onboarding expenses, such as training or orientation materials.

Identify all indirect costs

Indirect costs are expenses that are not directly related to the recruitment and hiring of a new employee, but that are incurred as a result of the hiring process. These could include the time and resources invested by existing staff in the recruitment and hiring process, as well as any additional costs incurred as a result of the open position, such as overtime pay or temporary staffing costs.

Calculate the total cost

To calculate the total cost to hire, organizations can add up all of the direct and indirect costs associated with the hiring process.

Calculate the cost per hire

To calculate the cost per hire, organizations can divide the total cost to hire by the number of hires made during a specific period of time, such as a month or a quarter. This will give the organization an average cost to hire for that period.

Recurring cost rate

It is a measure of the ongoing or recurrent costs associated with a particular product or service. It is expressed as a percentage of the total cost of the product or service and is used to help organizations understand the ongoing costs of maintaining or operating a particular asset or resource.

For example, an organization may calculate the recurring cost rate of a particular product by dividing the ongoing maintenance and repair costs by the total cost of the product. This will give the organization an idea of the percentage of the total cost that is being spent on ongoing maintenance and repair, which can help the organization understand the financial impact of maintaining the product over time.

How High Cost to Hire Can Affect Your Business?

Financial performance

A high cost to hire can impact an organization's financial performance, as it can take up a significant portion of the budget and reduce the resources available for other areas of the business.

Talent acquisition

A high cost to hire can also make it more difficult for organizations to attract top talent, as they may need to offer higher salaries or more generous benefits packages to compete with other organizations.

Employee retention

It also leads to decreased employee morale and potentially even high turnover, as existing employees may feel undervalued or underpaid in comparison to new hires.

Company culture

High recruiting costs can impact company culture, as it may create a sense of imbalance or resentment among existing employees.

Legal issues

A high cost to hire exposes an organization to legal issues, such as discrimination claims if certain groups of candidates are not being considered or treated fairly during the hiring process.

Company reputation

It impacts an organization's reputation, as it may be perceived as wasteful or inefficient.

Recruitment and hiring process

It becomes more difficult for organizations to optimize their recruitment and hiring processes, as they may need to allocate more resources to these efforts.

Productivity

A higher cost can impact productivity, as it may result in delays in filling open positions or require existing staff to take on additional responsibilities to compensate for the open position.

Talent management

This makes it more difficult for organizations to effectively manage their talent, as they may need to allocate more resources to recruiting and onboarding new hires.

Business growth

A high cost to hire can impact an organization's ability to grow and expand, as it may reduce

Factors that influence the cost of hire

- The type of job significantly impacts the overall cost of hiring. Jobs that require specialized skills or expertise may be more expensive to fill, as the pool of qualified candidates may be smaller and organizations may need to offer higher salaries or more generous benefits packages to attract top candidates.

- The level of experience and expertise required. Hiring highly skilled or experienced employees may be more expensive, as organizations may need to offer higher salaries or more generous benefits packages to attract top candidates.

- The location of the job impacts the cost to hire, as the cost of living and the local job market can vary significantly from one location to another. Hiring in a location with a high cost of living or in a high-demand job market may be more expensive.

- The efficiency of the recruitment and hiring process. A slow or inefficient process can result in higher costs, as it may require more time and resources to fill open positions.

- The cost to hire may also be affected by the salary and benefits offered to new hires. Offering competitive compensation and benefits packages can help organizations attract top candidates and reduce their cost to hire.

How to reduce the cost to hire?

Here are 10 ways organizations can reduce their cost to hire:

Optimize the recruitment process

Organizations can optimize their recruitment process by streamlining the application and review process, using technology to automate certain tasks, and utilizing social media and other online platforms to advertise job openings.

Use employee referrals

Employee referrals can be a cost-effective way to recruit new hires, as employees may be more likely to refer qualified candidates who are a good fit for the organization.

Utilize internships and apprenticeships

Internships and apprenticeships can be a cost-effective way for organizations to recruit and train new hires, as they can provide valuable experience and may be more willing to accept lower salaries.

Use free or low-cost job posting sites

Organizations can use free or low-cost job posting sites, such as LinkedIn or Indeed, to advertise open positions and reach a wider pool of candidates.

Negotiate with recruiting agencies

Organizations can negotiate with recruiting agencies to reduce fees or find agencies that offer more cost-effective services.

Offer competitive compensation and benefits packages

Offering competitive compensation and benefits packages can help organizations attract top candidates and reduce the cost to hire.

Utilize in-house recruitment and HR teams

Utilizing in-house recruitment and HR teams can help organizations reduce the cost of recruiting agencies and other external resources.

Use technology to automate certain tasks

Organizations can use technology, such as applicant tracking systems (ATS) and online assessment tools, to automate certain tasks and reduce the time and resources invested in the recruitment and hiring process.

Utilize temporary staffing

Utilizing temporary staffing can help organizations fill open positions on a short-term basis and reduce the cost of hiring a full-time employee.

Implement a strong onboarding process

A strong onboarding process can help new hires become productive more quickly and reduce the overall cost to hire.

Tracking your cost to hire can help you manage your budget better. Following are a few examples of the course of actions companies have taken after analyzing their recruitment cost.

Example 1

Ericsson, a multinational networking and telecommunications company, was able to reduce their overall hiring cost by 70% through social media and employee referral initiatives. It also had also helped the organization to achieve higher retention rates.

Example 2

Nokia used Indeed as their preferred job search engine to hire candidates. Applicants who applied through Indeed were directly guided to Nokia’s applicant tracking system. Thanks to this strategic decision, Nokia’s cost per hire was reduced by 74%.

Example 3

Nature’s Pride, a food and beverages firm, was on the verge of exponential growth. However, they were not growing their manpower as expected, by using external recruiting services. This is when they made a strategic decision to control their whole recruitment process. This resulted in an approximate drop of $1,100 per hire and allowed them to measure the performance of their recruitment process.

A one-size-fits-all approach does not usually work when recruiting as it depends on many variables mentioned above. Calculating cost to hire can help employers optimize their overall recruitment process and the hiring budget. Keep track of your internal and external expenses to get an accurate overview.