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Cost per Hire is one of the essential recruiting metrics that helps organizations measure the average expense of bringing a new employee on board. This includes internal costs, such as recruiter salaries and hiring technology, as well as external costs, like job advertisements and agency fees.
But how do you calculate cost per hire? What is the industry benchmark? And how can businesses optimize their hiring expenses without compromising quality? This article will break down these questions in detail.
Before diving into the calculation, it is essential to understand why cost per hire matters. Tracking this metric allows businesses to gain insight into their recruitment expenses and make more strategic hiring decisions. By analyzing cost per hire, companies can identify inefficiencies, reduce unnecessary spending, and improve their overall hiring process.
Here are some key benefits of calculating cost per hire:
By consistently monitoring and analyzing cost per hire, companies can make more informed decisions that balance efficiency, quality, and cost-effectiveness. Now that we understand why this metric is important, let’s break down how to calculate it.
The first step in calculating cost per hire is to decide on a specific timeframe. Do you want to measure it monthly, quarterly, or annually? The chosen period should align with your hiring cycles and business goals.
For example, a company that hires frequently may track cost per hire quarterly, while those with slower recruitment processes may review it annually. Having a clear timeframe ensures consistency in calculations and meaningful comparisons over time.
Internal costs refer to all expenses incurred within your organization for hiring new employees. These are typically fixed or semi-fixed costs that come from your HR department and internal processes.
Some common internal costs include:
To calculate your total internal costs, sum up all these expenses for the selected time period.
External costs include expenses paid to third parties for attracting, sourcing, and assessing candidates. These costs vary based on recruitment needs.
Common external costs include:
To calculate external costs, sum up all relevant third-party expenses incurred within the selected period.
See also: How to Do a Background Check: A Comprehensive Guide for Employers
Once internal and external costs are identified, count the number of employees hired during the same period. Ensure that all hires included in the calculation were recruited through the measured process.
For example, if you hired 50 employees in a year, that number will be used in the formula. If some hires were through internal promotions and didn’t involve recruitment costs, exclude them from the calculation.
Now that you have all the necessary data, use the standard formula to calculate cost per hire:
For example, if your internal hiring costs are $50,000, your external costs are $30,000, and you hired 40 employees, the calculation would be:
This means your average cost per hire is $2,000 per employee.
After calculating your company's cost per hire (CPH), the next step is to benchmark it against industry standards. Benchmarking helps you assess whether your hiring costs are efficient or if adjustments are needed to optimize your recruitment budget.
According to SHRM, the most recent data shows that the average cost per hire across industries is $4,683. However, this figure varies significantly depending on the industry and job level.
For executive positions, the cost is much higher, with an average executive cost per hire reaching $28,329. This is because hiring executives often involves additional expenses such as specialized recruitment agencies, relocation costs, and longer hiring timelines.
Recruitment expenses are influenced by several factors, including industry demand, job complexity, and location. Sectors with intense competition for skilled professionals, such as technology and healthcare, tend to have higher hiring costs. Similarly, executive and highly specialized roles often require more resources compared to entry-level positions.
The table below provides an overview of the average cost per hire across various industries:
Source: SHRM Benchmarking: Talent Access Benchmarks
Comparing your organization’s CPH with industry standards helps identify potential inefficiencies and cost-saving opportunities. A high cost per hire may indicate inefficiencies, while a low one could signal compromised hiring quality or ineffective sourcing strategies.
Regular benchmarking enables businesses to refine their recruitment approach, allocate resources efficiently, and enhance workforce planning. By continuously tracking and optimizing cost per hire, businesses can enhance hiring efficiency, reduce unnecessary expenses, and improve overall talent acquisition strategies to ensure they attract top talent while maintaining financial sustainability.
Reducing cost per hire is about optimizing expenses without compromising the quality of new hires. While overspending can strain budgets, excessively cutting costs may lead to ineffective hiring, lower-quality candidates, or longer vacancies. Striking the right balance allows companies to attract top talent while ensuring financial efficiency. Here are some practical strategies to optimize recruitment costs without sacrificing hiring effectiveness:
One of the most effective ways to reduce cost per hire is to ensure you're targeting the right audience from the start. Generic job postings often attract unqualified applicants, leading to wasted time and resources during screening. Instead:
A strong employer brand not only helps attract high-quality candidates but also reduces reliance on costly recruitment agencies and job boards. Research shows that organizations with a compelling employer brand experience an average 43% reduction in cost per hire , making it a critical investment for any recruitment strategy.
When candidates perceive your company as an attractive place to work, they’re more likely to apply directly to help reduce external recruitment expenses.
Automation tools can drastically cut down on manual tasks and improve efficiency throughout the hiring process. Consider adopting the following technologies:
By automating repetitive tasks, your team can focus on building relationships with top-tier candidates rather than getting bogged down by administrative work.
Employee referral programs remain one of the most cost-effective methods for sourcing quality hires. Employees tend to refer individuals they trust and believe will fit well within the company culture.
Additionally, research shows that referral hires are significantly more likely to stay with the company long term. In fact, 45% remain with the organization for over four years, compared to just 25% of hires sourced through job boards.
Since referred candidates typically require less training, onboard faster, and demonstrate higher retention rates, this approach not only lowers costs but also strengthens workforce stability and engagement.
Creating a talent pool allows you to nurture relationships with potential candidates over time, ensuring you have access to qualified individuals when positions become available. Here’s how to build a sustainable talent community:
Having a pipeline of pre-screened candidates reduces the need for extensive outreach campaigns and also shortens time-to-hire.
Data-driven decision-making is key for identifying inefficiencies and optimizing your recruitment budget. By closely monitoring key hiring metrics, businesses can refine their processes, reduce unnecessary costs, and improve hiring outcomes. Here are some critical metrics to track:
Regularly analyzing these metrics enables you to pinpoint areas for improvement and allocate resources more effectively.
Reducing cost per hire is not just about cutting expenses. It is about optimizing resources while maintaining hiring quality. By refining sourcing strategies, automating processes, and leveraging data-driven decisions, businesses can hire faster and more efficiently.
One of the most effective ways to lower cost per hire is by adopting AI-powered recruitment solutions like KitaHQ. With KitaHQ’s Automated AI Interviews, companies can eliminate the need for multiple screening rounds, reducing recruiter workload and minimizing scheduling delays. The Smart Scheduling System further cuts administrative costs by automatically coordinating interviews, ensuring a seamless hiring process.
By reducing time-to-hire by up to 10 times, KitaHQ helps companies significantly lower recruitment costs, including job advertising, recruiter hours, and screening expenses.
Want to see how KitaHQ can transform your hiring process and reduce your cost per hire? Book a demo today.
