Recruiting costs: Budgeting and cost per hire

What is the cost per hire?

The cost per hire refers to the average expenditure incurred in the process of hiring a new employee. This performance metric is particularly valuable for managing your recruitment budget. For instance, if your goal is to recruit 100 personnel within a year and your cost per hire is $4,000, you can project a total expenditure of $400,000 for the entire recruitment process. Monitoring the annual cost per hire over a number of years can also help you identify any noteworthy variations.

How do you calculate the cost per hire?

The Society of Human Resource Management (SHRM) collaborated with the American National Standards Institute (ANSI) to create a standard formula for calculating cost per hire (CPH):

What’s a good benchmark for cost per hire?

What constitutes a good benchmark for cost per hire? According to a recent survey conducted by the SHRM, the average cost per hire is slightly above $4,000, an average derived from all the companies surveyed by SHRM. Nonetheless, individual company averages may vary due to different factors. For example, the cost per hire hinges on the hiring volume. The more hires a company makes, the lower the cost per hire since some fixed costs can be distributed across a larger number of hires. Furthermore, certain roles and industries, such as engineering, may take longer to fill, leading to higher costs per hire due to accumulated hiring expenses.

Depending on the company size and industry, a desirable benchmark falls between $3,000 and $5,000.

The survey also revealed other findings, including:

1. 61 percent of employers offered tuition reimbursement, with an average maximum reimbursement of approximately $4,000 per year.
2. The average annual salary increase was 2.7 percent, with non-executive employees having a target bonus percentage of 4.7 percent compared to 10.2 percent for executives.
3. Of companies offering a 401(k), 402(b), or similar retirement plan, an average of 66 percent of employees participated, with the maximum employer match at 6 percent.
4. About one-third of companies had a succession plan, with executive teams (76 percent), senior management (71 percent), and middle management (46 percent) positions most commonly included.
5. Middle management positions had a median of eight direct reports, while executive positions had a median of five direct reports.

What’s a good benchmark for recruiting costs?

The costs of recruiting vary based on the unique requirements of each company. To manage recruiting costs effectively, a good starting point is to create a comprehensive budget while keeping in mind the average cost per hire. Once you have established a budget, it is recommended to use a spreadsheet or an Enterprise Resource Planning (ERP) system to track expenses and prevent them from exceeding the budgeted amounts.

It is essential not to fixate on recruiting costs alone. If investing in higher costs translates into hiring better-suited candidates for your team, then the expense is a worthwhile investment.

What should be included in a recruiting budget?

Consider your typical recruiting expenses when creating a comprehensive budget. Creating a detailed list of possible recruiting costs can help establish an accurate spending plan. Below are common expenses to include in a recruiting budget:

1. Job board fees: Costs associated with posting job openings on job boards.
2. Candidate assessment costs: Fees charged by companies offering pre-employment tests or coding challenges.
3. External recruiter expenses: Money spent on individual recruiters, staffing firms, or recruiting agencies.
4. Employer branding efforts: Funds spent on events such as campus recruiting days and career fairs.
5. Careers page costs: Expenses related to setting up, maintaining, and redesigning your careers page.
6. Internal recruiter costs: This is often the highest recruiting expense, which includes recruiter salaries, benefits, and travel expenses.
7. Other expenses related to recruiting, such as referral program bonuses, travel reimbursements for candidates, and Applicant Tracking System (ATS) costs.

Including these expenses in your budget will provide a complete picture of your recruiting costs.

How do I calculate my recruiting budget?

There are two ways to calculate your recruiting budget:

1. Use the average cost per hire: Start by adding up the actual recruiting expenses from the previous year and divide it by the number of hires made. The resulting figure is your average cost per hire. Next, multiply your average cost per hire by the number of hires you intend to make this year.
2. Add all projected internal and external costs: For instance, suppose you plan to hire 50 people next year. If you require 50 job listings across three different job boards, multiply each job board’s fee by 50 and then add all three numbers to calculate the total projected cost of job boards. Add up all other anticipated internal and external costs to get the projected recruiting budget.

What’s a good benchmark for a recruiting budget?

Utilize your cost per hire as a benchmark when creating your recruiting budget. Aim to keep your expenses around the average cost per hire for your industry, for example, if it's $3,000. However, do not be alarmed if your cost per hire exceeds this benchmark, as it could indicate that you are investing in more effective recruiting techniques. If your quality of hire and other key metrics are consistently robust, the additional investment is worthwhile.

Frequently asked questions

1. What should the cost per hire be? External recruiting costs are expenses associated with recruitment that are not part of internal recruitment costs. These may include costs for candidate travel for interviews or relocation expenses. The average cost per hire is typically around $4,000.

2. How do you calculate the cost per hire? To calculate the average cost per hire, tally up all internal and external expenses associated with a hiring process, then divide that sum by the total number of hires made within a specific period of time.

3. What is the average cost to recruit an employee? A study by the Society for Human Resource Management (SHRM) reveals that on average, filling an open position costs employers $4,129 and takes around 42 days. The expenses involved in hiring employees tend to rise in proportion to the length of the search, the nature of the job, and the salary range.