10 Factors in Calculating Total Cost per Hire

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Having been in the recruiting industry for decades, we’ve surveyed hundreds of hiring managers, business owners, and executives about what they like least related to using an external (aka agency) recruiter.  No surprise, the biggest issue for the vast majority is cost.  To better understand what was meant, we simply asked, “if you paid an agency and they found you the absolute perfect candidate that made their job easier, improved their business, and turned out to be a long-term key player in their organization, would they feel like they mind paying a recruiting fee?”  The vast majority responded by saying that under those circumstances they would not mind paying a recruiting fee.  This identified for us that while cost is important, Return on Investment (ROI) is what companies expect when hiring an agency recruiter to assist with a search.

So, how do you solve for recruiting ROI?  Unfortunately, it is not entirely objective, because every employer has different expectations for performance.  However, some simple math can at least establish a baseline for the hard (direct) costs.  The common formula used for calculating cost-per-hire (CPH) is “Internal cost” plus “external cost” divided by total hires.  Below are a few examples of the direct, or “internal” costs associated with most employers’ hiring.

Direct Recruiting Costs (Internal and External)

Employment Branding

Examples of employment branding include the cost of company social media accounts, time spent managing social media accounts, developing employment branding content, advertising, company PR, internal communications like employee newsletters, as well as any employee labor associated with employment branding.

Labor Cost

Recruiting/HR Labor is simply the salary and benefits of those involved in the recruiting process.  You can choose to add the hiring managers’ time, or limit to HR staff only. We suggest including the time of the hiring managers because their time spent recruiting and screening can no longer be applied to another aspect of their primary job/duties.

Recruiting Tools

Recruiting doesn’t typically happen without the use of an applicant tracking system (ATS), Job Boards, Resume Databases, List Services, Screening/Testing Services, or myriad other tools.  These costs are easy to calculate on a periodic basis (monthly, quarterly, annually), but your formulas for calculating CPH must be updated when new tools are added or removed from your tech stack.

Referral & Agency Fees

These fees can be employee referral programs, or they can be associated with agency or staffing fees.  It is much harder to calculate the CPH if you don’t know the margin your staffing agency is charging you (like with temp/contract employees).  Executive search fees are easier to calculate because their fees are not blended with the placed candidate’s pay rate/salary.

Relocation Fees

Relocation fees don’t always apply, but if they are necessary to secure your desired candidate then they are definitely a factor in the CPH calculation.

Simple, right?  Well, one thing often ignored and very hard to calculate or measure are some of the soft, or indirect costs associated with hiring. Indirect costs are hard to calculate, but we have seen them be far more costly than the direct (internal & external) coasts.  Below are a few indirect costs to think about when you consider your total Cost Per Hire.

Indirect Recruiting Costs (Soft)

Employee Morale

Understaffed companies, or companies failing to hire top talent are going to experience low employee morale.  When teams are under or poorly staffed then the higher performers carry a heavier workload.  Imagine a pack of sled dogs and one of them not pulling their weight.  It makes it much harder on the rest of the pack.  This is where fatigue happens, or potential injury in some cases. Sustained fatigue will cause turnover and the crazy cycle continues.

Company & Departmental Culture

Chronically low employee morale will have serious negative impact on your employment brand, which will exacerbate your existing hiring challenges. There is a direct correlation between employee job satisfaction and culture, and company culture with its employment brand.  The truth is, we all have a brand.  The question is how attractive it is.

Employee Turnover

No doubt turnover is costly.  There are direct costs and indirect costs.  Some professionals in HR will calculate the cost of turnover as high as 1.5x the annual salary.  Cost to recruit, hire, train, develop, salary, and benefits are all associated with the cost of employee turnover.  We can write an entire blog post on the topic of Turnover. 

Customer Satisfaction

If you are understaffed, then likely your quality and service level agreements (SLAs) are going to suffer.  Maybe you can avoid it for a short period, but if understaffed or suffering avoidable attrition is a chronic issue then no doubt your customer will begin to feel it.  Yet another cost to calculate is customer attrition.  It is avoidable most of the time, especially if you are able to remain staffed at appropriate levels and ensure candidate quality is in keeping with your Vision, Mission, Values.

Missed Opportunity Costs

Have you ever felt the tension between winning more work and not having the staff necessary to process the work?  It costs a lot of money to acquire a customer, no doubt.  People love to be on a winning team, so it’s frustrating when a company’s growth is strangled by it’s inability to hire the quality and volume of talent they need to capitalize on the opportunities in their market.  The company that figures out how to hire the right people generally find themselves with the most or the fastest growing market share.