How does your HR department measure recruiting efficiency? Cost per hire is one metric companies can use to evaluate and compare recruiting expenses. The cost-per-hire algorithm became an official recruiting standard in 2012 and is the first uniform way to measure and compare internal and external hiring costs.
The formula is simple, at a glance: Cost Per Hire = (External Costs + Internal Costs / Total Number of Hires). But early results from a recent survey suggest few companies are actually using it. According to the New Talent Times, “businesses should be keeping track of cost per hire metrics. Given the small number of responses to our survey, it would seem that they’re not.”
While measuring cost per hire can aide in organizational-level decision-making, some experts suggest the metric may actually hurt the recruiting function. Here we uncover some of the pros and cons of calculating cost per hire.
Pro: Hidden Cost Savings for Small and Mid-Sized Businesses
Calculating cost per hire requires HR to be proactive about tracking all hiring costs, from advertising and marketing dollars to screening fees, technology costs and recruiting event expenses. The New Talent Times survey found companies with fewer than 50 employees spend more on advertising and marketing expenses for each new hire than businesses with ten times that number of employees. If you’re a small to mid-sized business, you already know how critical it is to find the right talent to grow your business and stay on budget. Calculating cost per hire can give you a comprehensive view of how you’re spending that budget.
Pro: Managing Your Job Marketing Spend with Insight
Early results from the Advertising Cost Per Hire Survey found 84 percent of respondents are using job boards to promote open positions. “But as job board spend increased, average cost-per-hire also increased,” says Erin Osterhaus, Managing Editor of The New Talent Times. “[This indicates] that job board spend may not provide the best return on investment.”
To effectively manage your job advertising and marketing spend, you need to know which job boards bring in the most and the best candidates and which ones result in successful new hires. By investing in the job boards that produce the best candidates, you can adjust your marketing and advertising spend and decrease your average cost per hire.
Con: Measuring Cost Per Hire Distracts from Quality of Hire
Closely monitoring transactional costs associated with hiring can cause HR to solely focus on reducing those costs. “In my experience, cost per hire is an evil metric because calculating it takes up time and resources away from measuring the quality of hires,” says Dr. John Sullivan. Sullivan argues calculating cost per hire takes time and energy away from measuring the quality of hire, which can be more significant considering the value of a quality employee. For example, Apple exceeds $2.2 million per year for each hire.
Con: If You Try to Cut Too Many Costs, You Get What You Pay For
Attracting quality applicants can be expensive, depending on the level of skills and expertise you’re seeking. Hiring experienced recruiters and adopting the best HR technology are significant expenses for every HR department, but that’s because they are proven and effective tools for attracting and hiring the best applicants. Reducing the transactional costs associated with hiring and recruiting could put your company at risk for lower-quality hires and a negative experience for candidates and hiring managers.
Cost per hire is a valuable metric HR can use to improve the recruiting process, but it should not be used purely as a reason to cut costs. Apply the cost-per-hire formula to gather and evaluate recruiting data and use your findings to:
- Reduce inefficiencies throughout the recruiting process
- Leverage your HR technology systems and take full advantage of the functionality
- Decide what investments you can make now to increase speed of hire and reduce costs in the long run
Does your organization measure cost per hire? How have you used the SHRM cost per hire metrics to improve your recruiting process?
