A Detailed Guide About Calculating Cost per Hire
Remember that Cost Per Hire(CPH) is just a small piece in the puzzle of measurement metrics. Singularly, you will not find it that useful, however, it does prove worthwhile when included with a combination of other measurements and calculations.
Many employers ask “how to measure cost per hire” or “how to calculate cost per hire”?. This is the most interesting recruitment metric. Cost per hire is fairly simple to comprehend, but its calculation is tedious and time-consuming. It is effective for some, while it is not efficient or useful for others.
Here in this blog, we will discuss how to calculate cost per hire and the important terms included in the cost per hire calculator.
How do you calculate cost per hire?
Here is the simple formula:
Cost per hire or CPH = (Internal hiring cost + External hiring cost)/total number of new hires
This formula can be used to ascertain the CPH value monthly as well as annually.
What are Internal hiring costs?
Internal hiring cost or expense refers to the internal capital, organizational and staff expenses incurred while performing the recruitment functions. These expenses include the following, but are not necessarily limited to:
- Salary expenses of the time used by recruiting managers
- Salaries of the in-house talent acquisition reps
- Learning and development expense of the recruitment team
The internal hiring cost also includes any kind of allocation of resources from one department to the other for recruiting purposes, even though the money gets rotated within the company.
It is not necessary to include the salary of the hiring manager as it would make the calculations more difficult. You can include their salary only if there is a definite reason.
What are external hiring costs?
External hiring costs or expenses refer to the expenses incurred by external individuals or vendors during the recruitment process. These expenses include but may not necessarily limit to:
- Posting on job portals
- Fees of external agencies
- Assessment centres
- Providers of aptitude test
- Background check/Drug testing
- Relocation expenses
- Company branding activities
- Fees of the Applicant Tracking System
The calculations of CPH do not include any cost incurred by the new hires after they get hired, for instance, the cost for training and development.
Total number of new hires
Different companies have different methods of measuring this factor — the total number of new hires. But, in general, companies can include all their external or internal new hires in both full-time as well as part-time positions, who:
- Followed the recruiting process that was lead by the recruiting manager
- Were promoted to the full-time job position from a temporary job position
- Held fixed-term job contracts, which were greater than one year and are on the company payroll
The calculation can exclude:
- External workforce (contractors, consultants, etc.)
- A workforce that is on the third party payroll
- Newer employees from acquisitions or mergers
- Internal transfers
Cost Per Hire Comparable or CPHC
Cost per hire comparable is another kind of cost per hire. CPHC has the very same formula but it uses different data sets. The CPHC calculation includes expenses that are relatively common within companies. For instance, the calculation includes the fees of job portals but excludes the immigration expenses.
RCR or Recruiting Cost Rate
The formula to calculate RCR is as follows:
RCR = total internal and external hiring costs/total annual compensation of the new hires in the 1st year*percentage.
You could include the total yearly compensation before the new hire completes the 1st year. If so, in this calculation, the total yearly compensation would be the salary amount agreed through the employment contract of the employee.
If the ratio is lower it is better for the company. Because you would be spending less money to hire a high paying employee. Your HR department would be quite satisfied to hire senior-level, higher-paid employees with a low recruitment cost.
This calculation metric could be a lot more useful than the CPH. Because RCR calculation considers the market conditions as well as the different external conditions, which could impact the compensation levels.
The importance of cost per hire
Measuring CPH is not all that difficult when you learn the formula to calculate. You track your costs or expenses anyway. So, you could track a bit extra and calculate your expenses on hiring every employee. By giving additional emphasis on the hidden or small expenses, whether external or internal, will certainly enhance the visibility of the spendings during recruitment.
Three things to do after measuring cost per hire
Now, that you have calculated the CPH, what will you do next, let’s find that out.
- Benchmark the data or measurement of your organization with the values of your peers in the industry and the overall industry average. You can find your industry benchmark online through various credible sources.
- Analyse your CPH data with the type of position and the department. This information would help you determine the different factors, which could help reduce the CPH for a specific group or department of employees.
- Compare the CPH against your source of recruitment.
This information is likely to offer you a better view of the different job advertising verticals that are best for your recruiting efforts. To ensure more efficiency in tracking your source of recruitment, it is recommended that you use the latest tracking features, such as the ones that are embedded within the ATS.
Remember that CPH is just a small piece in the puzzle of measurement metrics. Singularly, you will not find it that useful, however, it does prove worthwhile when included with a combination of other measurements and calculations.
A company should choose a metric, which works best for their business and try to view the larger picture for long term. The single way that an entity can do it is by not being obsessed with a singular metric. Finally, do not be sceptical about the higher cost per hire value, it could just mean that your recruiting processes are effective and sophisticated.
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