The Reason Companies Should Calculate Cost Per Hire
Every once in a while, I run across an article that talks about why organizations shouldn’t calculate cost per hire. Personally, I’m a big fan of the cost per hire metric. I think it provides valuable information.
Back in 2012, the Society for Human Resource Management (SHRM) worked with the American National Standards Institute (ANSI) to create a uniform standard calculation for cost per hire (CPH). Basically, here it is:
CPH = (External Recruiting Costs + Internal Recruiting Costs) / Total Number of Hires for a Time Period
External recruiting costs include agency fees, advertising, job fairs, college recruiting, relocation, etc.
Internal recruiting costs include salary and benefits for everyone involved in the recruiting process as well as recruiting software, etc.
According to SHRM, the average cost per hire in 2016 was $4,129.
I believe the goal of calculating CPH is to provide organizations with a benchmark for their recruiting activities. Let’s say the organization is planning to open a new location next year. As a result, they will need to hire 10 employees. CPH gives the company some estimate to consider when it comes to the cost of staffing the new location.
CPH can also be a valuable number to share with hiring managers. I like to calculate CPH at the beginning of interview skills training. It’s an opportunity to put a dollar value on the cost of a hiring manager’s decision.
The goal of calculating CPH isn’t to make it $0. I don’t know if that’s even possible. Even if you’re the greatest place to work of all time, you will still have recruiting expenses. The goal of calculating cost per hire is to make sure the cost is acceptable. For example:
- If the company decides that it’s going to buy a recruiting software solution because it will save the company money, how will they know the return on their investment if they don’t calculate cost per hire?
- If the company is considering recruiting process outsourcing (RPO), how will they know if outsourcing makes sense for the business?
These are just a couple of examples, but you get the point. If the organization doesn’t calculate CPH, how will they know the cost? And on a strategic level, if HR gets the buy-in of senior management to add/change/delete components in the recruiting process, how will they sell the change (meaning what’s the measurement of success)?
Now, I get it…there’s lots of talk about quality of hire being the best recruiting metric. I’m not opposed to calculating quality of hire. However, it is a complicated metric by comparison.
And I know we sometimes hate to talk like this but quality of hire is based on the company’s budget. Organizations do not have unlimited funds to pay people’s salaries. So, quality of hire is relative to cost per hire.
Ultimately, organizations have to decide the best measurements for success. There are some old school metrics that still provide value. If you know how to use them.
Image capture by Sharlyn Lauby at a client’s site somewhere in Fort Lauderdale, FL
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