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What Is Cost Per Hire and How to Measure It

Summary: Learn how to calculate your cost per hire and why this is an important data point to know for your company.

Find out how to determine the cost per hire at your company.

Question: Due to pressure from our CFO, my boss has instructed me to begin tracking the cost-per-hire for new employees. I am not only unsure of how to go about this, but of what there is to gain from this when I have so many other things to do. Is there really any benefit to taking the time to track this, and what are the direct and indirect costs I should include when making this calculation?
 
Answer: While it's my guess that your CFO is making an effort to rein in costs and wants to know what each department is spending for various functions, that's just a guess. As for what's in it for you: your boss' (and your CFO's) confidence that you can and do follow through on the assignments you're given. Other than that, you'll provide your personnel department with some invaluable data on the company's hiring process.
 
The benefits probably won't be apparent at first, but after tracking a few new hires, patterns are likely to emerge that will show what does and doesn't work in acquiring new employees. After some time, you may notice that while job boards and newspaper ads work well for attracting quality candidates for front-line positions, external search firms work much better when searching for higher level managers and executives. Down the road, you'll use this information to allocate your resources more wisely when making new hires.
 
As for exactly how to figure out the cost per hire (CPH), there are a number of criteria that should be included. Be sure to keep track of internal costs, external costs, candidate interview expenses, and direct fees.
 
Internal costs refer to the cost of the company's personnel. The figure should be based on the time that an internal recruiter spends reviewing resumes and interviewing candidates, as well as travel expenses for recruiting trips, and overtime that is paid to other employees who are covering the duties of the as-yet-to-be hired person. External costs are for fees paid to cover the cost of an outside recruiting agency. Any money you spend on flying candidates in for interviews or to set up video interviews, as well as lodging and meals, and relocation expenses you may spend on the chosen candidate, should be included under candidate interview expenses. You may also want to include signing bonuses under this category. Finally, direct fees include costs associated with advertising, job or college recruitment fairs, and employee referral bonuses.
 
All of those measurements are tangible to a certain degree. To get a more accurate measure of your company's true CPH, you may also want to figure the learning curve of the new hire into the equation. In other words, how much time/money will you have to spend on training this person and how much production will be lost while bringing this new person up to speed?
 
Of course, these categories as I've described them are not cut and dried. Not every line item has to be included where I've placed them. For further information, you may want to consult the Employment Management Association of the Society for Human Resource Management (SHRM) at www.shrm.org. Look up the EMA's latest Staffing Performance Survey, which is sure to provide you with further information on calculating cost per hire, as well as regional trends for this measurement.

For more information about managing your business’s finances, see the following article:

Avoiding a Financial Crisis: How to Keep Your Small Business Alive