“Cost per Hire: Do you know how much your selections cost?

🟣 When a company makes a decision to hire a new employee, most often the focus is on how long the selection process will take and whether the most suitable candidate will be found. However, there is another indicator that we recommend that every company that regularly hires monitor - this is "“Cost per Hire”, or the cost of employing one employee.

This metric helps you understand how much it really costs your company to find an employee. It also helps you plan your HR budget more effectively and assess whether your recruitment process is delivering value to your business. More importantly, it helps you make decisions based on data, not gut feeling. So do you know how much your recruitment is costing you?

What is “Cost per Hire”?

Cost per Hire (CPH) – is the average amount a company spends on hiring one employee.

The most widely used calculation methodology in the world has been developed by Society for Human Resource Management (SHRM) together with American National Standards Institute (ANSI). According to it, the formula looks like this:

Cost per Hire = (internal recruitment costs + external recruitment costs) ÷ number of employees hired

At first glance, the formula seems simple, but in practice, many companies only estimate a portion of the actual costs, so we will provide more extensive insights below.

How much does it really cost to find an employee?

Most often, companies calculate the cost of publishing job advertisements or the fee of a recruitment agency. However, this is only a part of the total recruitment costs.

The total “Cost per Hire” should include HR specialist’s working time, hiring managers’ participation in interviews, candidate assessment tools, selection management systems (ATS), employee referral programs, LinkedIn, Selection Specialist training, employer image strengthening programs, and other investments related to the search for employees. In other words, only after assessing all direct and indirect selection costs can one objectively understand how much it costs a company to find and hire a new employee.

Example:

Let's say a company spent €12,000 on recruitment in one quarter. This includes job postings, candidate testing tools, the recruiter's time, and working with a recruitment agency. If six employees were hired during the same period, the cost of hiring one employee would be €2,000.

Does it exist? good „Cost per Hire?

One of the most common questions is what is considered a good „Cost per Hire” indicator? There is no universal answer to this question, because the cost of searching for an employee depends on many factors. These include the complexity of the position, the market situation, the required competencies, the shortage of candidates, and the selection process. For example, searching for a Customer Service Specialist may cost less than selecting an IT Architect, Production Manager, or Finance Director. Not only search channels may differ, but also the duration of the selection, the number of colleagues involved in the process, and the assessment methods. Therefore, it is much more important not to compare your indicator with the results of other companies, but to monitor how it changes in your company over certain periods.

Why does a lower “Cost per Hire” not necessarily mean a better result?

Naturally, every company seeks to optimize costs. However, excessive savings in personnel selection can cost much more than it usually should. If, due to a smaller budget, inefficient candidate search channels are chosen, competency assessment is abandoned or the first suitable candidate is hurriedly hired, in the long run employee turnover may increase, work results may deteriorate and the selection may have to be repeated. Therefore, it is recommended to evaluate “Cost per Hire” together with other personnel indicators, such as “Time to Hire”, “Quality of Hire” or others. Only the totality of these indicators allows us to understand the true cost of selection efficiency.

The biggest costs of selection are often hidden not where we expect

Interestingly, Recent HR analytics research shows, that the largest part of the “Cost per Hire” often does not consist of job advertisements or the services of a personnel selection agency. Long selection processes, multiple interview stages, slow decision-making and managers’ time spent on assessing candidates cost organizations much more. In other words, the most expensive resource in selection is often not money, but people’s time. Therefore, optimizing processes can have a greater impact on the overall costs of selection than simply trying to reduce external costs.

What value can cooperation with a recruitment agency create?

Evaluating only the price of the agency service may give the impression that cooperation increases the “Cost per Hire”. However, such an assessment often does not take into account all the benefits to the business. An experienced personnel selection agency can help significantly shorten the time to fill a position, reduce the time managers spend on candidate selection, and reach specialists who are not actively looking for work. This is especially important when searching for managers, specialists with rare competencies, or employees in highly competitive markets.

The quality of selection is no less important. Structured interviews, competency assessments, psychometric tests, and market analysis allow for more informed decisions and reduce the risk of inappropriate hiring. Inappropriate hiring is often one of the most expensive HR mistakes.

Finally, by collaborating with recruitment partners, a company receives more than just a recruitment service. They receive labor market insights, compensation insights, information about candidate expectations, competitor hiring trends, and recommendations on how to improve the recruitment processes themselves.

Personnel selection should not be viewed as an expense. It is an investment in the growth of the organization. And a good investment is not judged by how much it cost, but by the return it generated for the business.