How to Calculate Cost Per Hire: Formula + Calculator

Quick Answer

Simply put, to calculate cost per hire, you’ll need to divide your internal and external recruiting costs by your total number of hires within a given timeframe. The formula is simple:

Now, Let’s Break It Down

Now that we’ve uncovered the mystery of how to calculate your cost per hire, let’s delve into the long form answer to this question.

In this article, we will tackle how to break down and identify your internal, external, and hidden recruitment costs, why knowing your cost per hire is important, along with common mistakes with calculation, and easy strategies to lower your cost per hire.

Key Takeaways

• Understanding the formula: Cost per hire can be found by adding your internal and external costs, and then diving their sum by your total number of hires within a given period.
• Why it matters: Knowing your cost per hire is key to evaluating your recruitment ROI, making informed budget decisions, and identifying how you can optimize your hiring process.
• What to include: You should factor in all of your recruitment-related expenses in your cost per hire calculation—like recruiter and hiring manager time, advertising, technology, and assessments—while excluding indirect like onboarding and salaries after hiring.
• Common pitfalls: Miscalculation can happen by ignoring impactful direct costs, losing track of your spending, or ignoring the cost of bad hires.
• Improving your CPH with strategy: You canreduce your costs by conducting interviews virtually, recruiting internally, and incentivizing employee referrals to source high-quality candidates affordably.

Cost Per Hire: What Is It and Why Is It Important?

I remember a time when talent acquisition was as simple as posting a job ad in the newspaper and waiting for the right candidate to walk through the door; and that was pretty much the extent of a business’s cost per hire.

But now, with advancements in technology, evolving labor laws, and the growing need for in-depth screening, the hiring process has become more complex… and more expensive. With that in mind, when it comes to hiring as business owner, you must know your numbers!

Cost per hire (CPH) is a useful metric that tells you the cost of your recruiting or, in other words, the total cost you will incur for each new employee you hire. This vital performance metric is essential for business owners or HR teams to understand the cost-effectiveness of their hiring and recruitment process.

Knowing your CPH is important because it helps you assess the financial impact of your recruitment efforts. If you’re not tracking your CPH, you run the risk of:

• not getting a return on investment (ROI) with the cost you’re paying to hire new employees.
• losing the benefit of understanding how to optimize your hiring process in terms of cost.
• being unable to forecast your future hiring expenses accurately.
• overspending on talent acquisition.
• other major operational inefficiencies.

So, hiring isn’t solely about finding top candidates. Managing the expenses tied to your hiring effectively should also be a priority.

What Should “Cost Per Hire” Include?

Now, what should (and should not) be included in your cost per hire calculation? I know this is a question that trips up many HR professionals and business owners, and knowing what to include and exclude can be tricky.

To get an accurate CPH, you’ll want to tally up your expenses related to your in-house hiring team and their processes (internal recruiting costs), and the expenses associated with any third-party assistance or services you use to hire (external recruiting costs) – excluding costs not directly related to the recruitment process.

Here’s a closer look at what these expenses may include:

Internal Recruiting Costs

External Recruiting Costs

Excluded Costs

It’s important to note that each business will handle the categorization and inclusion/exclusion of their recruitment costs differently – there is no unanimity when it comes to calculating CPH. You may opt to count your recruitment software costs, and the next business won’t; or you may feel the need to include your financial losses due to your hiring managers being out of the office to perform recruitment efforts, whereas the next business may not consider it worth their time. It all comes down to what makes the most sense to your business and your books.

Cost Per Hire Calculator Excel Template

📥 Want to skip the guesswork in putting together expenses and calculating your CPH? Download our FREE and helpful Cost Per Hire Calculator Template below!

Putting It All Together

So, now that you’re clear on how to sort your costs, let’s put that formula we talked about earlier into action. Let’s walk through a real-world example of how a field service business might go about calculating their CPH.

Star Heating & Cooling Co. is a growing mid-size company with 74 current employees – eight of which they hired within the last year. They’re aiming to continue their expansion but, before they move on to their next round of hiring, they would like to know how well they’re doing with their spending on recruitment as it stands. How much is Star Heating & Cooling Co. paying for each new hire?

Step 1: Start by Tallying Up the Internal Costs

Star Heating & Cooling Co.’s Internal Recruiting Costs

Internal Recruiting Cost Total: $31,300

Step 2: Now, Let’s Calculate the External Costs

Star Heating & Cooling Co.’s External Recruiting Costs

External Recruiting Cost Total: $29,265

Step 3: Count the Number of New Hires

This step is the simplest of them all. We’ll just need to count how many hires were made within the time period we wish to track. In this example, we know Star Heating & Cooling Co. acquired eight new hires within the last year.

Step 4: Plug in the Numbers

Conclusion: With a CPH of $7,570.62, we find that Star Heating & Cooling Co. is spending far too much on talent acquisition. With the average cost per hire in the United States being at around $4,700, it is clear that they need to reassess their hiring and recruitment spending.

3 Common Mistakes When Calculating Cost Per Hire

Overspending isn’t the only mistake you can make with your CPH. While it is a pretty straightforward calculation, there are some common oversights. In my experience, I’ve seen many business owners and HR professionals frequently:

#1. Omit the cost of bad hiring in their CPH calculation

The financial impact of a bad hire is something many businesses overlook. For every hire that doesn’t work out, you must incur the cost of replacing that employee which comes along with new sourcing and acquisition expenses.

#2. Ignore indirect costs, like the financial loss due to new hires’ low productivity.

In many cases, it can take a new hire a substantial amount of time to get up to the same performance level as your more seasoned employees. While it is an expense incurred after the hiring process, not meeting quotas or making errors that result in monetary loss during this transition period should be factored into your total hiring costs to get a more accurate picture.

Learn how to boost your employees’ productivity.

#3. Fail to track expenses accurately and effectively

Keeping a pile of paper receipts, swiping that company credit card without account, and guesstimating your spending can all lead to some serious miscalculations. Failing to employ a specialized bookkeeping and accounting software to track your hiring-related expenses, using averages, and missing expenditures should be avoided in order to ensure a reliable CPH.

Again, these may all be things your company doesn’t have to closely track because you have a low turnover rate and are making excellent hiring decisions. Again, what you decide to include and leave out of your CPH calculation will heavily depend on the characteristics of your specific business.

Why Getting it Right Matters

Knowing your CPH with great confidence and understanding where your business or departments stand in terms of recruitment spending gives you the power to optimize and significantly improve the overall financial health of your company.

Getting it right means you’ll be able to:

• understand what amount of resources you should dedicate to hiring in the next round.
• know how well your hiring staff are managing their spending and be able to adjust accordingly.
• identify areas where recruitment costs are exorbitant and target your optimization.
• ensure that you’re getting value and results for what you’re spending.

You can work all day to deliver exceptional services and products, but if you fail to recognize and plug the leaks with your overspending, it could greatly compromise your business’s fiscal success.

Moreover, getting your cost per hire right isn’t solely about reducing your spend; it’s also about improving your entire recruitment operation to engage, select, and keep top talent while maximizing your return on investment in human capital. 

Insider Tips: Strategies to Lower Your Cost Per Hire

So, now that you know how, you’ve ran the numbers and found that you’re hemorrhaging money on recruitment spending. Here are some easy and practical adjustments that have worked for me in my business, and that you can make too, to tighten up your budget and improve your ROI with your talent acquisition:

💡 Insider Tip #1: Try to recruit internally, first!

Don’t overlook the talent that already exists within your company. Seek candidates from within to promote and you’ll not only drastically lower your cost of hiring by cutting down on onboarding and training expenses, but you’ll also boost morale and strengthen relationships with your employees.

💡 Insider Tip #2: Go virtual!

The expenses that accompany in-person interviews can add up quickly. For that reason, I highly recommend video interviews. By adopting the method of virtual interviewing, you can do away with the cost of reimbursements and stipends for things like travel fees, food, and hotel stays or rent for interview spaces and refreshments.

💡 Insider Tip #3: Encourage and amp up incentives for referrals!

Employee referrals are a ridiculously easy and cost-effective way to source new candidates. Incentivizing your current employees to bring in talent can nearly eliminate your recruiting efforts and spending for a hire. This is not only great for finding high-quality hires, but this strategy can also improve your turnover rate – which will save you even more money down the road.

Put it into Play!

A reliable CPH is your best friend when it comes to making better informed, more affordable hiring decisions. While many companies don’t go through the trouble of tracking this valuable metric – or do it with little care – the benefits of doing it properly can be significant for a business. So, don’t skip this step!

I hope this simplified guide makes all the difference for you and your company!

Looking to bring invaluable insights, strategy, and precision to your business finances? Check out our article, How to Hire an Accountant and Why You Need One.

FAQs

1. What other technologies can I utilize to lower my cost per hire?

There are many technologies available to help simplify and lower the cost of hiring. I would advise you to look into technologies like: applicant tracking systems (ATS) to automate most of the recruitment process and free up your hiring managers’ time, digital assessment tools to improve your candidate filtering and save resources on potentially unfit candidates or bad hires, and using collaboration platforms to facilitate communications between recruitment team members to speed up the recruitment process – saving you money.

2. What’s a good figure to aim for with my cost per hire?

The answer to this question will vary depending on a company’s size and the position for which a company is hiring for. Though, on average, a good figure to aim for in terms of your cost per hire would be around $4,000. However, I would encourage you to check the benchmark for your specific industry to get the most accurate picture of what you should aim for.

3. How often should I track my cost per hire?

To make your CPH tracking effective, you’ll want to check it at consistent intervals – this is the main key. Checking it annually is good, checking it quarterly is great, and checking it monthly might be a proper fit for your business depending on your hiring frequency. It all comes down to what time frame will provide the most meaningful insights and comparisons for your business.