Cost per hire is the total cost of your recruitment process, divided by the number of people you hired. Work it out over a twelve-month period and you have a good picture of your cost per hire. Many companies spend more on recruitment than they need to. What we see is that companies rarely have a clear view of their cost per hire. That is a shame.
How do you calculate cost per hire?
The definition is simple, the calculation less so. What many employers forget is that the process often carries unnecessary variable costs. There are various internal and external costs to account for. Let us start by mapping out those internal and external costs.
Internal costs
- Salaries of the entire recruitment department
- Courses and training for the recruitment department
- Overheads and workspace for the recruitment department
- Salaries of hiring managers
- Referral programme bonuses
- Employees hired
- External & internal candidates
- Employees taken on from a temporary agency contract
- Interns, optional to include
External costs
- Job postings on your website
- ATS candidate management tool
- LinkedIn Recruiter seat
- Access to other job boards
- Employer branding
- Recruitment agency fees
- Job board postings
- Intelligence and personality tests
External costs are often left out of the cost per hire. That gives you an unrealistic picture of what you are spending on recruitment. Companies are regularly taken aback when we lay their cost per hire out for them. A lot can be saved on external costs by outsourcing part of the recruitment process. Many recruitment partners already have an ATS or a LinkedIn Recruiter seat, for example, so you do not have to put money into those yourself.
A worked example
The formula: internal plus external costs, divided by the number of hires. Take a company that hires ten people over twelve months, at an average of €60,000 gross a year. The amounts below are assumptions for this example:
- One recruiter on the payroll: €67,200 (€4,000 gross a month plus 40% employer costs)
- Hiring manager time: €7,200 (twelve hours per hire at €60)
- Referral bonuses: €2,000
- Job boards and LinkedIn Recruiter: €7,500
- Job postings and employer branding: €6,000
- Intelligence and personality tests: €1,500
- Agency fees for two of the ten hires: €26,400 (22% of €60,000, twice)
That adds up to €117,800, or €11,780 per hire. The biggest item here is the in-house recruiter: €67,200, well over half the total. Those costs keep running when fewer people join. With five hires the recruiter alone is €13,440 per hire; with ten it is €6,720.
What an agency costs
An agency charges a percentage of the gross annual salary of the person you hire. According to YoungCapital's recruitment guide, the Dutch average is around 25% of gross annual pay, including holiday pay and other benefits. Depending on how hard the role is to fill, it runs from 20% to 35%. On €60,000, 25% comes to €15,000.
Sennasearch charges 18 to 25% of the gross annual salary. The percentage is fixed before the search starts, and the invoice only comes once the candidate has signed. On €60,000 that is €10,800 to €15,000. There is more on this under the cost of search and selection. Ask every agency what amount the percentage is calculated on, because it differs.
What a bad hire costs
Cost per hire tells you what hiring costs, not what it costs when it goes wrong. Gallup estimated in 2019 that replacing one employee costs between half and twice their annual salary, and calls that a conservative estimate. On €60,000 that is €30,000 to €120,000. In the US, SHRM's benchmark put the average cost per hire at nearly $4,700. Someone leaving in their first year quickly costs more than the hiring did.
When is it smart to outsource recruitment (in part)?
Fast-growing companies such as start-ups and scale-ups are considerably better off leaving recruitment to a specialist. The fewer people you take on, the higher the external costs per hire and therefore the higher your total cost per hire. On top of that, companies with fewer vacancies often do not yet have an efficient recruitment operation in place to find the right candidates quickly.
How to keep cost per hire down
Without numbers per item, you cannot see where the money goes. Four things to track:
- Per channel: which channel did each hire come through, and what did it cost? That shows which job board or agency pays for itself.
- Hiring manager hours. Interviews and assessments by people on a high hourly rate are missing from most calculations.
- First-year turnover. Anyone who leaves within a year makes you pay the cost per hire again.
- Time to hire, from opening the vacancy to the signed contract. As long as the seat is empty, work is left undone.
What an in-house recruiter, an agency per vacancy or RPO would cost in your situation, you can work out in the cost calculator. Enter the number of hires per year and the average gross annual salary.
