Understanding Cost-Per-Hire: What’s Driving It Up?
If you’re like me, you’ve come to expect the sticker shock that accompanies opening a bill or seeing the total at the checkout counter. These days, it’s no longer a surprise when things cost more than you expect–although it still stings.
Hiring is one of the many activities that’s more expensive than it used to be, so if your company is feeling the squeeze, you’re not alone. The Society for Human Resources reports that the average cost per hire jumped from $4,129 in 2019 to $4,700 in 2023–a 14% increase.
To understand what’s driving the rising cost per hire and help you meet your future staffing needs, I’ll break down what’s involved in this important recruitment metric and share some tips for keeping it under control.
What Is Cost Per Hire?
Cost per hire, or CPH, is a recruiting metric that measures the average cost of hiring a new employee. It consists of direct and indirect costs.
Direct costs are quantifiable hiring expenses tied directly to a recruiting activity, like running a job ad. Indirect costs are less tangible and aren’t always easy to quantify, like the time hiring managers spend looking at resumes instead of producing business results.
Here are some of the biggest expenses that go into cost per hire.
- Recruitment. Job ads, marketing campaigns, events, recruiter salaries, referral bonuses
- Technology. Software you use to facilitate hiring, like your ATS
- Vendors. Third-party partners that assist in hiring activities like background checks and drug screening
- Onboarding. Administrative time and expense associated with completing necessary new hire paperwork
- Lost productivity. Every hour a hiring manager spends interviewing candidates or a team member spends helping the new hire get up to speed is an hour they’re not spending on job-related activities
- Vacancy costs. Costs that result from being down a team member / having a new hire at less than 100% productivity
I like to think of cost per hire as being similar to a personal budget. There are some items in the budget that are non-negotiable. Food would be one example in a personal budget, and maybe your ATS is one within your HR department. Then there are items that are nice to have but not essential, like a beach vacation or, in a recruiting context, a hiring event.
Understanding the difference between direct and indirect costs as well as essential and non-essential expenses will help you get a better handle on your cost per hire and keep it from ballooning beyond a manageable amount.
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The Importance of Understanding Cost Per Hire
Knowing your cost per hire is necessary to achieve a number of important business goals, like:
Allocating your budget
Understanding your cost per hire is essential for ensuring that you have enough funds available to meet your staffing needs and don’t overspend.
For example, let’s say you have a budget of $50,000, and you need to add 15 new employees to your staff this year. You can tell whether this is a realistic goal by looking at your cost per hire.
If last year’s cost per hire was around $4,000, you would be over budget by about $10,000 if you stayed at that same pace ($4,000 x 15 = $60,000). Either your spending needs to come down, your recruitment strategy needs to change, or you need to adjust your staffing goals. This analysis can help you make smart budgetary decisions promoting financial stability.
Related: Tips for Managing Your Recruiting Budget
Improving recruiting efficiency
As we covered a moment ago, cost per hire has many components. A close examination of these components can reveal gaps where you’re spending too much or not spending efficiently.
We experienced this with one of our clients, a retail chain that onboards a large number of seasonal employees every holiday season. When their finance manager reached out with budget concerns, we looked closely at the breakdown of their hiring costs.
We saw that they were spending a disproportionate amount of money on onboarding and training expenses. Further inspection revealed that high turnover was to blame. We shifted our recruiting strategy, tightening up screening and actually bumping the hourly wage higher to attract more dependable candidates who wouldn’t be as likely to leave after a short time. As a result, we were able to curb turnover and take the bite out of those inordinate onboarding and training costs that were raising the company’s CPH.
Defining recruiting strategy
Your cost per hire can guide decisions about how much you can spend and when you can spend it.
To go back to the personal budget analogy I mentioned earlier, it’s like when you’re getting through those last few days before you receive your next paycheck. You might be craving steak for dinner, but when you look at your weekly grocery budget, you know chicken is the practical option.
In the same way, if your cost per hire is getting too elevated, you may need to make strategic cuts or more practical choices. But if you’ve stayed under budget, you may be able to adjust your strategy to accommodate some more of the “nice to have” line items like sign-on bonuses or bigger ad campaigns.
Related: How to Develop an Effective Hiring Strategy for Long-Term Success
Monitoring performance
Staying on top of your cost per hire can tell you how your recruiting strategy is performing over time. We always want to improve continuously, but what does that mean? Metrics like cost per hire are a good way to quantify the results of your efforts and assess whether you’re getting better over time or need to devote more attention to certain parts of your recruiting strategy.
Related: How to Leverage Recruiting Metrics to Improve Your Hiring Process
How to Calculate Cost Per Hire
To calculate cost per hire, add up all of the direct and indirect expenses associated with hiring. We covered a number of these above. Set a time frame for your calculations, like expenses within the last 12 months.
Then, divide the total by the number of people you’ve hired within that time frame. The result is your cost per hire. Here’s how the equation looks:
Total recruiting expenses / total number of hires = CPH
Most companies calculate cost per hire on a quarterly or annual basis. If you hire a small number of employees, choosing an annual calculation can help you get a more accurate result.
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Factors Driving Up Cost Per Hire
We’ve established that the average cost per hire is increasing. Now, let’s examine what’s contributing to the rising costs.
Talent shortage
Unemployment continues to hover near 4%, which is historically very low. This means fewer qualified candidates are open to new opportunities, and recruiters must devote more resources to finding them, which costs money.
An aging workforce is adding to the talent shortage. With Baby Boomers–who represent 20% of the U.S. population–reaching retirement age, more people are currently leaving the workforce than are entering it. This means even if every person in the country who wanted a job had one, there would still be unfilled openings due to too few workers.
Skill requirements
Across industries, employees require a different set of skills than they did a decade ago. Technology is advancing faster than our workers’ collective knowledge, resulting in stiff competition for candidates who possess the most in-demand capabilities.
If you want to secure the skills necessary for future success, particularly in areas like artificial intelligence, data analysis, and cloud computing, you’ll need to outspend the majority of your competitors or find other creative ways to stand out.
Employer branding
Speaking of creative ways to stand out, employer branding is one way to get ahead in the race for top talent. In the past, it was a strategy reserved for enterprise-level organizations looking to become household names. Now, even small- and medium-sized businesses are leveraging employer branding to connect with candidates and attract more applicants.
It’s an excellent strategy, but it’s also an expense, adding to rising costs per hire.
Market shifts
The rise of employer branding is one example of a change in the recruiting industry’s norms that’s impacting cost per hire. Other shifts are driving up costs, too.
For example, five or six years ago my recruiters could do pretty well sourcing candidates on LinkedIn and reaching out to them with a personal message. It didn’t cost anything but the recruiters’ time. Now, everyone’s doing that, and candidates no longer pay attention. Getting results on LinkedIn means spending money to promote your listings and investing in tools like LinkedIn Recruiter–new expenses that inflate cost per hire.
Inflation
From rent to raspberries, expenses are rising at a faster-than-normal rate in nearly every category. That means all other factors aside, core recruiting expenses like background checks, job board membership fees, and your own recruiters’ salaries simply cost more than they used to. Because of inflation, you may find that hiring consumes a bigger portion of your overall budget for the near future.
Strategies for Managing Cost Per Hire
Keeping cost per hire in check doesn’t mean cutting corners. It means optimizing processes and making strategic decisions based on your hiring goals and budget. Here are my top six strategies for managing cost per hire without compromising on quality.
Consolidate technology
Last year, my recruiting team was searching for a platform that could help us accomplish a niche functionality, and I had a rude awakening. We assessed our current tech stack to determine if any of the apps we were already paying for could do what we needed. They couldn’t–but we did discover that many of them had overlapping tools, and in some cases, we were paying twice for essentially the same set of features.
Between applicant tracking systems (ATS), candidate relationship managers (CRM), HR information systems (HRIS), and other applications, many companies experience unnecessary technology overload. Analyzing your tech and looking for overlap can help you consolidate platforms, saving on costs and simplifying work for your team.
Related: The Top Recruitment Assessment Tools and Technologies
Shop around for services
Along the same lines, many organizations overspend on hiring simply because they fail to shop around. We price shop for things like cars and consumer goods all the time, but we forget we can also do it for technology.
Regularly assess vendor performance and compare different service providers for the latest rates and special deals. If you’re happy with your current platforms but see a better deal elsewhere, many vendors will match competitors’ pricing to keep you as a customer.
Invest in retention
Turnover is one of the biggest enemies of CPH as replacing employees is expensive. Prioritizing retention will reduce the frequency of new hires, lowering recruitment costs over time.
Begin by focusing on a strong onboarding process that sets new hires up for success and longevity. Next, invest in initiatives like mentoring and employee development opportunities to keep workers engaged.
Finally, when a new opening becomes available, make internal recruitment your first avenue. Promoting from within not only saves you the expense of external sourcing but also engages strong performers and makes them more likely to stay with the organization.
Maximize employee referrals
Employee referral programs pack a one-two punch of being both low cost and highly effective. They’re often a low-hanging fruit you can capitalize on with minimal effort. Create a structured referral program with meaningful incentives (cash is always a hit) and promote it regularly to employees.
Polish up job postings
Well-crafted job postings attract quality applicants while deterring unqualified ones, saving you time and money. Write job descriptions that are clear, engaging, and aligned with the company’s culture. Streamline your application process, making it easy for candidates to apply in as few steps as possible. Fine-tune your employee value proposition, highlighting the benefits and perks that are most likely to resonate with your target candidate.
Leverage analytics
Data-driven decision-making is key to controlling CPH. You can pinpoint inefficiencies and improve your recruiting ROI by analyzing hiring metrics like time to fill, channel effectiveness, and application completion rate.
For example, if your analytics reveal that a certain job board is delivering low-quality candidates despite high advertising costs, you may find you can cut that expense completely without any impact to hiring. If you notice high new-hire turnover rates, digging into the root cause with exit interviews can help you determine whether your screening or onboarding activities might need refinement.
I hope this breakdown proves that just because costs are rising, you don’t have to sit back and eat the increased expense. By proactively understanding your cost per hire and working to optimize it, you’ll enhance efficiency, eliminate unnecessary spending, and foster long-term employee retention.
