How to calculate cost to hire (and why it’s important)

How to calculate cost to hire

Knowing what it costs you to find and evaluate new talent can help you identify the places where it’s appropriate to take cost-cutting measures — or to invest a little more. After all, a bad hire will cost you much more in the long run, so it’s never a good idea to skimp.

Average cost to hire

Your average cost per hire is quite simply the total amount you spend on recruitment annually (more details on that below) divided by the total number of hires you made that year. Depending on whom you ask, the benchmark figure for the average cost to hire is around $4,000 — but it could be as low as $1,000 for an entry-level service job, and it frequently tops $5,000 for jobs in a professional setting. On its own, this number can’t tell you very much.

Only by drilling down into the component costs can you begin to determine your cost per hire for an individual role, or by department—and only then do the figures begin to yield useful information. These component costs break down into two major categories, and even within these categories, you’ll find that only some costs are negotiable, while others are fixed.

Internal costs
  • HR salaries. Whether it’s a human resources manager, a hiring manager, or an assistant, any salaried employee contributing to the hiring process should be considered, ideally by estimating the number of hours they spend working on a given hire.If your hiring manager makes $80,000 a year, for instance, and spends two hours posting a job, eight hours reviewing resumes, and 10 hours interviewing candidates for a specific job, first calculate their hourly salary ($80,000 / 48 work weeks a year / 40 hours a week = $41.67), then multiply it by the hours spent per hire (20, in this example). The result is your HR salary cost—in this case, $833.40.
  • Recruiter commissions. Have an on-staff recruiter? If they’re salaried, you can use the same formula as above, for a per-position breakdown, or divide by the total number of positions filled in the year for a per-position average. If they’re working on commission, be sure to add the cost of their commission to your total.
  • Employee referral bonuses. Note that you may have bonuses earmarked differently in your budget — as a bonus line-item, for instance, rather than a hiring cost—but this cost should still figure into your cost to hire.
  • Employee signing bonuses and relocation costs. 
  • Infrastructure costs. This cost includes any physical spaces used during the hiring process — that is, an office. To estimate these infrastructure costs, take the fraction of your office devoted to hiring over the year, and multiply it by the fraction of time those spaces are used for hiring, then multiply the result by your total annual rent and utilities. For example, if you interview candidates in a boardroom that takes up one tenth of your office space, and those interviews occupy the boardroom for roughly three weeks over the course of a year, the fraction of your office devoted to hiring is 0.1 × 0.0577 (that’s three weeks divided by 52 weeks) — which equals 0.00577. If your rent and utilities come to $500,000 a year, your infrastructure cost to hire is 0.00577 × $500,000 = $2,885.
  • Software licensing / website. Does your hiring team use an applicant tracking system, or ATS? If yes, this cost should be counted, as should any costs devoted to creating and maintaining your company’s careers page.
External costs
  • Agency fees. This includes any recruitment agencies you hire on a contract basis, as well as headhunters, RPOs, consultants, and the rest.
  • Advertising costs. Today, this primarily takes the form of job boards like Workopolis.
  • Career fairs, on-campus recruitment events, conventions, etc. Don’t forget to include the cost of any non-salaried staffers, as well as travel expenses for those who are salaried.
  • Testing services. That is, the cost of any companies you employ to perform baseline aptitude tests or pre-screening, usually during the pre-interview stage.
  • Background check services. Unless you have a gumshoe on staff, background checks are typically performed by contractors.
How much is too much?

Best practices suggest calculating your cost to hire at least once a year, to keep an eye on any sudden leaps in spending. But when it comes to that spending, how much is too much?

Again, the amount you’ll want to invest in each hire will depend on the position—but a general rule of thumb is that you should be spending somewhere between 16 and 20 per cent of the employee’s starting annual salary. The more entry-level the position, the closer to the low end of that range you should target.

But there are some extenuating factors to bear in mind. Volume, for one; if you’re looking to fill 20 of the same position at once, you can spread your total costs across more hires, reducing the cost per hire. Similarly, if you consistently hire for the same type of role, you’ll be able to refine your procedures over time, developing best practices that will boost your efficiency. Larger companies also tend to have a multi-person hiring team that can break down and assign tasks with greater efficiency, which gives them an advantage in lowering their cost to hire.

On the other hand, in some unavoidable situations, the search for a single suitable candidate can drag on for much longer, or require more external support. This could apply to a highly technical or specialized role (even if it’s not an especially high-paying one, like a job that requires unusual language skills), or to roles that are extremely in-demand, like blockchain programmers. In both cases, you can expect the competition or duration of the search to drive costs significantly above the benchmark goal.



See also:
5 ways to avoid losing top talent to a higher paycheck
Finding the words to talk about pay
Which compensation structure is right for your company?


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