Recruiting has always been a critical function for any organization. However, in today’s labor market, it seems the pressure is on recruiting more than ever before. In the wake of the great reshuffle, teams are sprinting to try and fill open roles in higher volumes. And when combined with reduced budgets due to inflationary pressures, it seems that recruiting is being asked to work miracles, and hire more people with less budget!
In these unique times, recruiting must be laser-focused on how they can best stretch their budgets to deliver the best outcomes for the business. But what is the best way to measure recruiting effectiveness? What is the north star metric that teams can align on? For many, the answer is cost per hire. In this post, we will discuss why cost per hire is a mission-critical metric to measure your talent acquisition effectiveness, as well as provide guidance on how to best measure it to help you make more informed decisions about your budgets and strategies.
What is Cost Per Hire?
Cost per hire is the total cost incurred by an organization to hire a new employee. It includes all expenses related to recruiting, such as advertising, job postings, career fairs, agency fees, employee referral bonuses, relocation costs, and other related expenses. Recruiting teams that understand their cost per hire are at a strategic advantage in setting their organization up for success, making course corrections to align with market trends, and effectively showcasing their value to executive leadership.
Here are some of the benefits of measuring cost per hire in your organization:
Budget With Confidence
Measuring cost per hire helps organizations budget their recruitment expenses with more certainty. This data-driven approach provides a work-back framework that lets you more accurately predict how much you will need to effectively fill certain roles. For example, if you know that the average cost per hire for a sales associate role in one of your stores is $2,000, and the hiring forecast for that store is 10 sales associates over the course of the year, then you can estimate that it will take $20,000 to successfully fill those positions.
Continually Optimize Sourcing Channels
Teams that align around cost per hire are empowered to change up their sourcing strategies and continually optimize their spending. By directly linking your various outreach channels to cost per hire, whether it’s job boards, social media, career fairs, and more, linking that investment back to cost per hire helps you to identify the sources that are delivering the best results and which sources you should deemphasize in your strategy.
Optimize Recruitment Processes as Well
Using cost per hire as a measuring stick can also help teams better understand where there might be inefficiencies in their recruiting processes. For example, say you have a warehouse associate role in one region that has a lower cost per hire than a similar role in another region. If your team is using the same sourcing channels for each role, but a different interview process, you now have a clear indicator of how you can potentially improve to help drive down that cost per hire. Long gone are the days when you blindly test new approaches. Instead, let cost per hire guide you to where you can implement best practices that work across your entire organization.
Measuring Cost Per Hire
The formula for calculating cost per hire is:
Total recruiting expenses / Total number of hires = Cost per hire
To calculate the cost per hire, an organization needs to add up all the expenses related to recruitment and divide it by the number of hires made during a specific period. While the formula seems straightforward, it can get complicated once you consider everything under the umbrella of “total recruiting expenses.” Those costs can be both hard and soft, so it’s important to consider both.
Hard costs are much easier to measure, and a good way to start understanding cost per hire. The types of expenses associated with hard costs include:
- Costs of digital sourcing channels (job boards, advertising, social media, etc.)
- Agency fees
- Employee referral bonuses
- Relocation costs
- Travel expenses
- Recruitment software and other tools
Soft costs are equally as important, but can often be more difficult to define. This is because soft costs are mostly associated with the time the team invests during the interview process, and often span across the organization (recruiters, hiring manager, etc.). These sorts of activities include:
- Posting jobs across various channels
- Application screening
- Scheduling interviews
- Conducting interviews
- Preparing offers
For these measurements, it’s ok to start with estimates. But as your team matures, it’s important that you make an effort to accurately quantify these costs, because it will make your ultimate cost per hire metric much more effective at predicting costs.
Measuring cost per hire is an essential metric for any organization that wants to optimize its recruitment strategies and budgets. It’s a great entry point for teams that want to embrace data-driven approaches that help them optimize their spending, as well as their processes. The result is not only a more cost-efficient recruiting practice but also better processes that lead to more hires and better business outcomes. And in both cases, your executive leadership will be thrilled with the results! Even if you just start with documenting your hard costs, it goes a long way in helping you continually improve to show just why recruiting is so critical to the success of your organization.