What is cost per hire?

What costs are included in the cost per hire?

Cost per hire can be used to measure what the hiring of a new team member costs a company on average. But what exactly are the costs that are recorded with this key figure?

Advertising/communication costs

The first thing that comes to mind when thinking of these terms is the cost of publishing the job advertisement – be it online or offline, digital (TV, radio, etc.), or analogue (posters, newspapers, etc.).

Costs for personnel marketing

The creation and maintenance of the career site including all activities for the presentation of the employer branding as well as the development of a talent pool and the onboarding of a new team member must also be taken into account for the cost per hire. 

Costs for personnel services

Sometimes attracting quality talent requires a little help from an expert – for example, in the case of difficult-to-fill positions such as in IT or the healthcare sector.
In this case, the costs for talent sourcing by headhunters (or the company itself), or the use of a temporary employee, also flow into the cost per hire.

Relocation costs and remote workplaces

International teams and the diversity that goes with them are increasingly valued. This is also often associated with relocation or remote work.

The costs that are then incurred for relocation or the establishment of a remote workplace must also be taken into account for the cost per hire – as well as any travel expenses that a company reimburses as part of the selection process.

Internal effort costs 

Last but not least, there are of course the personnel costs – but not only for the recruiters or HR managers and decision-makers involved in the hiring process. 

It is also important to include any training or retraining costs that employers pay to enable the talent they are hiring to do their job. 

How can you calculate the cost per hire?

The internal and external costs that can be allocated without doubt (proportionally, if applicable) are added together and divided by the number of hires made. The cost per hire formula is therefore:

Cost per hire = (internal + external hiring) / number of hires*.

*Costs and number of hires should relate to a specific measurement period (e.g. monthly, quarterly, or annually).

Why should cost of hiring an employee be monitored?

Hiring well-trained professionals is a necessary but often very expensive undertaking that can financially overwhelm fast-growing start-ups and SMEs in particular. 

Let’s take a look at some reasons that a company might want to monitor the cost per hire. 

• Valuable insights
  
  Measuring and monitoring cost per hire provides companies with valuable insights into the relationship between hiring costs and the number of positions filled.
  
  Only with knowledge of the actual cost can action be taken to scale and optimise.

• Costs multiply quickly
  
  An unfilled vacancy costs a lot of money. Every measure taken to fill the vacancy increases these costs even more. And just like vacancy costs, recruitment costs increase steadily as the recruitment process continues.
  
  For example, most (paid) job advertisements expire 30 days after they are published and lose their visibility. If no successful recruitment has been made during this time, further high recruitment costs are steadily incurred by republishing the job ad over and over again.

• Facilitate budget planning
  
  Setting a fixed budget for recruitment costs can help companies streamline their costs. Cost per hire can be used as a basis for this and makes it easier to set a budget for a wide range of cost items (postings, recruitment services, branding, etc.), positions and departments.

Cost efficiency is not everything

Cost per hire also has its limitations in terms of informative value. For example, it does not tell companies whether they are investing enough money in attracting high-quality employees. Its use is therefore controversial.

In principle, it makes sense to work cost-efficiently and to keep the cost per hire and the effort relatively low. However, it is also possible to save in the wrong place. 

For those who only focus on cost efficiency easily lose sight of the fact that recruiting (and the associated hiring costs) is an investment in the future and the continued existence of the company.

Sometimes a little more money has to be spent on investments. But this is well worth it if better candidates can be recruited (and retained) in return. A higher cost per hire is therefore not necessarily a bad sign.

However, if there is a steady upward trend, it is imperative that companies get to the bottom of the causes in order to prevent unforeseen financial burdens.

Nevertheless, cost efficiency is vital, especially for young companies and SMEs, in order to remain competitive and not be stunted in their growth.

How can companies reduce their recruitment costs?

To reduce recruitment costs, companies can take some simple but very effective measures:

• Plan the recruitment process better
  The longer it takes to fill a position, the higher the cost per hire.
  
  However, with good planning of the recruitment process, this can be effectively counteracted. Our blog article on must-dos in the recruitment process offers helpful advice for this.
  
  
• Use employee referrals
  Talent pools are a great thing, but they take time and a lot of maintenance. Employee referrals are a little easier.
  
  Existing employees suggest qualified professionals from their circle of acquaintances and receive a bonus if they are successfully recruited.
  
  
• Track channel efficiency
  Posting channels, be they job boards, job search engines or social media, work differently for each company.
  
  If you know which platforms work well for your search, you can better target your budget to profitable channels, effectively increase your reach, and improve cost efficiency.
  
  
• Conduct video interviews
  The interview process is probably the most time-consuming part of the recruitment process. But especially for initial interviews, resources such as time and travel costs can be saved by conducting them online.
  
  This not only makes the selection process noticeably more efficient, but can also improve candidate selection.
  
  
• Use an ATS like JOIN
  The use of an applicant management system additionally contributes to the streamlining of processes. The all-in-one ATS from JOIN, for example, combines numerous other features in addition to the simple management of applications:
  
  For example, with free multi-posting of search engine-optimised job ads, it creates more reach and attracts talent faster and more specifically, while measuring channel effectiveness and identifying the best options for paid ads. 

Maintaining job offers is also simple and efficient: Thanks to the automatically synchronising job widget, job advertisements only have to be created once in JOIN and then always appear on the careers page, updated daily.

Implementing the above measures to reduce hiring costs can also increase hiring success at the same time. You can find more useful suggestions for more hiring success in our Recruitment & HR blog.