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Cost Per Hire – Definition, Calculation, and Optimization Strategies

What is the cost per hire?

Cost-per-Hire (CPH) is a recruiting statistic that calculates the overall expenditure of acquiring a new employee. It covers both internal and external expenditures involved with finding, recruiting, and onboarding a candidate, divided by the total number of hires in a given time period. A lower CPH means a more cost-effective recruitment process, while a larger CPH means potential inefficiencies that need to be addressed.

To determine cost per hire, use the following formula: CPH = (internal + external recruitment costs) / total number of hires.

Internal costs: This includes the recruiter’s salary, referral bonuses, and administrative fees.

External costs: These include job board and agency fees, as well as advertising charges. Internal costs: This includes the recruiter’s salary, referral bonuses, and administrative fees.

Factors Affecting Cost-Per-hire

CPH is affected by various factors, which increase or decrease it depending on the situation.

Industry and Job Level: Executive and specialized jobs demand more resources, resulting in higher CPH.
Recruitment Strategy: In-house recruiting teams can be more cost-effective than external firms.
Candidate Availability and Demand: High-demand talents lead to higher recruiting expenses owing to competitiveness.
Hiring deadlines and urgency: Fast hiring deadlines and urgency usually require premium services like paid job ads or staffing agencies.
Geographic location: Recruiting in high-cost hiring territories will be expensive because of high salaries and competition.
Turnover rate: Increased turnover means continued hiring, which maximize the total cost of hiring.
Economic conditions: Economic conditions which is the availability of employment, have a variable impact on the costs associated with hiring.

Methods to Reduce Cost-Per-Hire

Optimal hiring practices can greatly reduce recruiting expenses.

Implement an Employee Referral Program: Implement an employee referral program to cut advertising and sourcing expenditures.
Use social media and job boards: Post job vacancies on LinkedIn, Twitter, and specialty employment sites for cost-effective results.
Use Recruitment Automation Tools: Use ATS (Applicant Tracking Systems) to automate recruitment and save time for HR.
Develop a Talent Pipeline: Create a Talent Pipeline to save time and money on outreach to previous applicants.
Conduct online interviews: Conduct online interviews that minimize the cost of traveling for candidates as well as interviewers.
Reduce the use of external agencies: Reduce recruitment costs by hiring internal recruiters instead of external agencies.
Streamline onboarding processes: Streamline onboarding processes to save administrative costs and increase employee productivity.

The Role of Technology in Reducing Cost-Per-Hire

Using technology to expedite recruiting and cut costs.

Applicant Tracking Systems (ATS): ATS automates resume screening, interview scheduling, and applicant communication.
AI-Powered Screening Tools: Algorithms match resumes to job criteria, eliminating manual work.
Video Interview Platforms: Video interview platforms such as Zoom, Microsoft Teams, and HireVue save travel expenses and scheduling delays.
Chatbots for Initial Candidate Queries: Use chatbots to automate initial candidate queries, decreasing HR burden and response times.
Data Analytics in Recruitment: Data analytics in recruitment helps identify inefficiencies, analyze sourcing effectiveness, and anticipate hiring trends.
Cloud-based collaboration tools: Cloud-based collaboration tools improve communication between recruiters, hiring managers, and applicants.
Remote recruitment solutions: Online testing and virtual assessments save costs by eliminating geographical boundaries.

Measuring and Improving Cost Per Hire

To maintain a cost-effective hiring process, organizations should continually evaluate and adjust their CPH.

Track Cost Trends Over Time: Analyze recruiting expenses over time to discover inefficiencies.
Compare Against Industry Benchmarks: Compare CPH to industry benchmarks and norms.
Assess Hiring Source Effectiveness: Determine which channels (job boards, referrals, agencies) provide the best hires at the lowest cost.
Evaluate Employee Retention Rates: High turnover raises CPH, but boosting retention reduces long-term recruiting expenses.
Improve Recruitment Marketing Strategies: Targeted advertising ensures job posts reach the correct demographic, eliminating waste.
Develop Workforce Planning Strategies: Develop workforce planning strategies to predict future employment requirements and optimize recruiting efforts.
Take advantage of recruitment partnerships: Collaborate with educational institutions and employment boards to save on sourcing costs.

The Importance of Cost-Per-Hire in Business Strategy

Cost-per-hire is a critical factor in driving corporate decisions and long-term viability. Organizations that measure and optimize CPH can increase their financial efficiency, allowing them to make better recruiting decisions.

Budget allocation: it helps organizations to plan and manage resources judiciously to make their recruitment budgets even more effective.
Workforce Planning: Improves long term workforce planning by aligning recruitment costs with organizational goals.
Increased recruitment efficiency: Increasing recruitment efficiency by eliminating unnecessary delays and fees.
Competitive advantage: Companies with low CPH can hire the best people while remaining financially sustainable.