Cost per hire: How to calculate it and how to reduce it

Calculating cost per hire can tell your company exactly how much it spends to attract, source and hire a new candidate.

But unlike with other, more clear-cut recruiting metrics, many talent acquisition leaders struggle to accurately measure, track and benchmark this cost.

When the average cost per hire is $4,700 in the United States, it’s necessary for in-house recruiters to understand where these expenses come from—and find ways to reduce them. After all, hiring costs add up quickly, especially for organizations making multiple hires throughout the year.

Keep reading for everything you need to know about calculating, understanding and optimizing your cost per hire. It might even be easier than you think.

What is cost per hire?

Cost per hire (CPH) is a key recruiting metric that calculates how much a company spends to fill an open position. It helps talent acquisition leaders answer important questions, like “Are we spending our recruiting budget wisely?” and “How could our hiring processes be refined?”

CPH accounts for both internal recruiting costs and external recruiting costs, such as paying for staffing services (in-house or third-party), premium job ads, or subscription fees for talent acquisition solutions.

It begins when a job ad is posted and ends upon filling the role—although some organizations also include onboarding expenses in their tallies of total cost.

Tracking cost per hire can feel like trying to solve a complex puzzle, especially for talent acquisition leaders at large organizations with complex workflows. But here’s why it matters: when you understand what you’re spending to bring new talent on board, you can make better decisions about where to invest your resources and show leadership exactly how your recruiting efforts impact the bottom line.

Internal recruiting costs

Internal hiring costs include any in-house expenses incurred during the recruitment process. Common examples include:

• Recruiter salaries: Compensation of in-house recruiters, talent acquisition specialists, and HR professionals that attract, source, and interview candidates.
  
• Technology subscriptions: Any software involved in talent acquisition, such as applicant tracking systems (ATS), recruitment marketing software, and candidate experience management (CXM).
  
• Overhead costs: Operational and administrative costs of hiring like office space and utilities for the recruitment team, department equipment maintenance, and any items offered to candidates during interviews (ex. business cards, refreshments, company swag).
  
• Employer branding: Investment in making your company look attractive to job seekers through internal marketing campaigns, career site improvements, and getting current employees to create content showcasing why your company is a great place to work.
  
• Referral bonuses: Financial incentives paid to current employees who successfully refer chosen candidates for their new roles.

External recruiting costs

External hiring costs are your company’s expenditures on any outside recruiting services or activities, such as:

• Agency fees: Hiring fees for external recruiters or staffing firms to assist in sourcing and placement of candidates. These fees are typically higher when recruiting for C-suite or hard-to-fill roles at a company.
  
• Job board postings: Advertising costs for listing your jobs on platforms like LinkedIn, Indeed, and Glassdoor. Premium listings on job boards often offer greater visibility and targeted outreach that may help with deepening your talent pool.
  
• Background checks: Compensating a third-party agency to perform pre-employment screenings and provide final confirmation that  candidates are truly a qualified fit before extending an offer.
  
• Assessment tools: Paying for any third-party skills assessments, aptitude tests, or technical evaluations to screen job applicants and verifying their credentials.
  
• Off-site recruitment events: Costs associated with attending or exhibiting at job fairs, industry conferences, or campus recruitment events to connect with employment hopefuls.
  
• Candidate travel expenses: Reimbursement for transportation, accommodation, and meals for out-of-town job candidates invited for in-person interviews with the hiring managers.
  
• Relocation assistance: Moving expenses, temporary housing, and other benefits offered to candidates relocating from different geographic areas to join your company.

How to calculate cost per hire

Calculating cost per hire is straightforward, but can be time-consuming as it requires gathering and including multiple data points. Here’s the formula you’ll want to use:

CPH = (internal costs + external costs)/total number of hires

To measure CPH for new employees, you start by adding up how much it spent on recruitment over a set period. Once your internal and external costs are totaled, divide the amount by the number of new hires.

Let’s say your company spent $300,000 on internal costs (ex. in-house salaries and recruiting software) and $100,000 on external costs (ex. job ads and agency fees) to hire 50 people. Your cost per hire would be $8,000 per person ($400,000 ÷ 50 = $8,000).

Keep in mind that CPH varies—and sometimes by a lot—depending on the hiring industry, seniority level, office location, and even the time of year. For instance, recruiting an entry-level graphic designer almost always costs less than a Chief Marketing Officer (CMO).

How to reduce cost per hire

When it comes to reducing cost per hire, there are actionable strategies you can take. But talent acquisition leaders must also recognize that certain roles will always be more expensive to fill—regardless of your recruiting team’s best efforts.

Simply put, the average cost per hire varies by industry, and sometimes quite dramatically.

Before looking at strategies for lowering your CPH, let’s review the average amounts spent on hiring new employees. This benchmarking data was compiled by the Society of Human Resource Management (SHRM):

If your industry’s hiring costs look high, don’t be discouraged by what you see!

Regardless of sector, there are steps for reducing CPH without sacrificing the quality of your candidate pool.

Use AI and automation

Adopting AI-powered solutions can lower your cost per hire by automating and streamlining the recruitment process.

Rather than replacing talent acquisition specialists, AI recruiting acts as a personal assistant to your (human) team, handling low-value, time-consuming tasks that eat up their valuable time.

• Reduce admin work: Free up recruiters to focus on high-value activities by using AI-powered recruiting tools for such routine tasks as resume screening, interview scheduling, and even engaging talent.
  
• Boost candidate screening and matching: Deploy AI algorithms to scan your candidate database and identify individuals with the best-fit qualifications to match your job requirements.
  
• Schedule interviews with candidates: Stop playing email tag and use automated scheduling tools to coordinate meetings between recruiters, hiring managers, and candidates.

Improve employee referral programs

Employee referral programs prove that current team members are often your company’s best recruiters.

When you encourage staff to refer qualified candidates for open roles, you’re tapping into pre-screened talent pools where candidates likely already have a good idea of your company and its culture.

Plus, referred employees are shown to stay 70% longer than their non-referred counterparts.

Leveraging employee referrals also costs less than traditional recruiting methods. In fact, research suggests that referral programs save companies about $3,000 per new hire.

Enhance candidate relationship management

Prioritizing candidate relationship management can reduce cost per hire by nurturing a strong pipeline of engaged talent.

Here’s how an AI-driven candidate relationship management system, as offered by iCIMS, can maximize ROI while minimizing sourcing effort:

• Quickly identify top talent: Ease recruiter workloads by using AI to generate shortlists of qualified candidates via skills matching. By handling the first screening, your software will free up your team for more face-to-face meetings and meaningful interactions with job applicants.
  
• Rediscover great past applicants: Automate talent rediscovery at scale to find and engage previous applicants and alumni, who might be perfect fits for your latest openings.
  
• Engage candidates with personalized content: After filling your talent pool, don’t let your hot leads go cold. Keep them interested with curated marketing materials and communications tailored to resonate, sent via their preferred platforms, whether that’s by text, chat, or email. 

Build a strong employer brand

Think of your employer brand as your company’s recruiting magnet. When you build a strong reputation as a great place to work, qualified candidates will come to you, reducing how much you need to spend on outbound recruiting efforts.

To strengthen your branding, start by identifying platforms where potential candidates spend time. Next, create and post content for these channels that shows your workplace culture in the best light, such as glowing staff testimonials about the perks of working there.

Recruitment marketing software can make this easier by helping you create compelling career sites, personalized content campaigns, and employee-generated content to attract top talent.

Start reducing your cost per hire

To sum up, reducing cost per hire is about being strategic with your resources, rather than cutting corners during the hiring process.

What’s the secret? Pairing the right recruitment software with a strong employer brand and well-nurtured relationships with candidates. By adopting this trifold approach, you can streamline and accelerate your recruiting pipeline, while still bringing in the right talent to drive your company’s long-term success.

See how to optimize your cost per hire by scheduling a demo today.