What does it cost to hire a new employee?
The term Cost Per Hire (CPH) is an important — yet often misunderstood — term that helps to calculate the cost of recruiting, interviewing, onboarding, and ultimately bringing on a new team member. This metric can help determine the cost-effectiveness and efficiency of your recruitment strategy. Over time, your CPH can also also be used to calculate other variables, such as your top-performing sourcing platforms and the ROI of your employer branding and campus recruiting initiatives.
According to the Society for Human Resource Management (SHRM) the average cost per hire in 2022 is $4,683 (if you’re hiring an executive, that number skyrockets to $28,329). In other words, your organization will spend roughly $4,700 to fill a vacancy, from sourcing top talent to training an employee. But what do these figures mean for your overall employer branding strategy?
Calculating your cost per hire doesn’t just help curb costs and optimize your recruiting ROI. Below, we explain how to use your CPH to optimize your recruiting strategy, retain top talent, and create a candidate-first experience.
How Do You Calculate Cost Per Hire?
Before we explain how to use CPH data internally, you need to know how to make the calculation.
SHRM calculates cost per hire as the following:
CPH = ((Sum of external costs) + (sum of internal costs)) ÷ total number of hires
In this formula, total external costs include third-party agency fees, advertising, and marketing costs, and traveling to on-campus recruiting events. Meanwhile, internal costs include the salary of your recruiting team and any fixed fees related to talent acquisition (such as your Applicant Tracking System).
For example, if you spend approximately $300,000 on travel, paid advertisements, and event promotion, and another $600,000 on recruiter salaries and software to hire 200 recent graduates, your CPH would be as follows:
($300,000 + $600,000) ÷ 200 = $4,500.
In this example, your cost per hire is $4,500. On its own, this figure tells you very little about the effectiveness of your recruiting strategy (other than it’s on-par with industry standards). Below, we explore how to apply this data to invest in high-converting resources, compare strategies across department lines, and ultimately reduce early-career turnover.
4 Ways to Use Your Cost Per Hire (CPH) to Optimize Your Recruiting Strategy
Your CPH is a useful metric when allocating recruiting costs and streamlining your employer branding strategy. With that being said, you should never view your CPH in a silo. Below, we offer four tips to help use these metrics to improve your hiring process:
1. Breakdown Costs by Source of Hire
Going through the process of calculating your cost per hire can help you calculate another metric: your Source Of Hire (SOH). Your SOH helps determine the percentage of new hires that came from a specific source, whether it be LinkedIn, Glassdoor, Indeed, Handshake, or internal referrals.
Keeping track of hiring sources can be done manually or automatically through your ATS. This data helps prove which avenues help attract (and sign) top candidates, and which methods result in a sub-par conversion rate. Overtime, you can determine where you should dedicate the majority of your recruiting budget, and which sources should be eliminated altogether. By only investing in high-converting sources, you can streamline your recruiting resources while decreasing your overall CPH.
2. Compare Cost Per Hire Across Department Lines
It is unrealistic to expect a blanket recruiting strategy to work for every role, within every department within your organization. The candidate experience should be personalized to the recruit’s role, level of experience, and unique skill set (psst — Abode can help with that!), which will cause strategies to shift across department lines.
With that being said, there’s absolutely no reason why departments can’t compare effective tactics, processes, hiring sources, or procedures. Compare CPH data from various departments, identifying patterns on what worked, and what could be revised for next year’s wave of recruits.
3. Consider External Factors in the Hiring Market
While it’s important to analyze your CPH metrics, it’s equally important to take this calculation with a grain of salt.
Critics of CPH calculations state that focusing on one number can decrease the value of your new hire while distracting your team from recruiting priorities. For example, as the Great Resignation continues into its second year and job vacancies soar nationwide, employers may invest more into recruiting. In addition, as a volatile candidate market wears on burnt-out employees, recruiter turnover is up across industry lines.
Each of these factors will certainly increase your CPH — but it’s not necessarily a sign you’re doing anything wrong internally. Long story long: Never look at your cost per hire in a vacuum, and instead consider influential factors within the current hiring market.
4. Compare Your CPH to the Cost of Turnover
If your cost per hire seems steep, consider this: What is the cost of employee turnover?
Onboarding a new, successful teammate — one who brings a fresh perspective, contributes to their department, and alleviates the burden on burnt-out team members — makes that $4,700 investment well worth it. A dedicated, driven new hire can bring in millions of value for your organization over the course of their career. On the contrary, research shows the cost of a bad hire can be 30% of their salary due to decreased morale, productivity, and (potentially) turnover.
Creating a candidate-first experience, one that extends from your talent community through an individual’s first year on the job, is imperative to improving employee retention. Rather than aiming to decrease your CPH in efforts to cut costs, focus on reducing new hire turnover, which will pay higher dividends in the long run.
How Abode Delivers Invaluable Data for Early-Career Recruiters
Your cost per hire (CPH) is an important metric that can help streamline your recruitment strategy. With that being said, you should never analyze your CPH in a vacuum. Instead, compare your CPH to your sources of hire (SOH), cross-department strategies, external factors, and your turnover rate to get a 360-view of your recruiting strategy.
The more your recruiting team can collect data on your hiring procedures and talent community, the better informed your decisions will be. Fortunately, Abode works seamlessly with platforms you’re already using (including your ATS and Human Resources Information System, or HRIS), to collect additional data on your audience. Abode collects data by journey and by candidate so you can know 1) which recruiting efforts maximize candidate engagement and 2) which candidates are most excited about the opportunity. Over time, this data helps reduce your turnover and renege rate, while preserving time, budget, and team bandwidth.
Ready to see how Abode's platform can help you collect more data on your talent community, helping to reduce early-career turnover? Use the form above to submit a request for a demo and we'll be in touch!