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How to Use Data to Calculate Cost Per Hire?

Whether it’s fair or not, hiring units are constantly under stress to cut down on their cost per hire (CPH). 

Trying to break down your CPH is a crucial organizational tool for evaluating the cost efficiency and effectiveness of your recruitment processes, making recommendations for improvement, plus guiding your hiring budget.

In fact, CPH counts among the most fascinating recruiting metrics. It’s easy to understand. However, you can take some time to calculate the value. 

It’s clear for some, but it’s a mystery to others. Therefore, to help you out, in this blog, we’ll look at what data can be used to determine your company’s CPH.

A detailed guide on how you can use key statistics to determine your CPH

Here’s a rundown of how you can calculate your company’s CPH so as to streamline your hiring process.  

The formula to calculate CPH

Source: Recruitee Blog

Companies determined CPH in a variety of ways until human resource professionals developed a standardized equation in 2012. It was a joint collaboration between the American National Standards Institute (ANSI) and the Society of Human Resource Management (SHRM).

It is equivalent to the total summation of your external and internal recruiting prices divided by your total hires number during a given timeframe (usually one year). Here’s the CPH formula:

(Total internal recruiting costs + external recruiting costs) / (total number of hires in a given time frame)

Now, if you wish to get into more details and learn how to calculate cost per hire alongside additional vital metrics – like ‘time to hire, time spent on stage, and proceed rate’, you can check out the above link. 

You will then get a better understanding of how to benchmark your hiring process – by visualizing and analyzing data.

Yes, data is important. Even though recruiting the ideal candidates is expensive and takes time, it is preferable to spend some hours and evaluate your data instead of bringing in the wrong employees.

In the next sections, we will explain in detail how you can use data to your advantage while determining CPH.

Internal costs

Internal costs are defined as “internal employees, investment, and organizational expenses involved with the hiring process.” Among these expenses, we have:

  • Salaries for in-house talent recruiting teams
  • Hiring management staff’s salary costs for number of hours worked on the task
  • Costs of learning and development for your Talent Acquisition (TA) team
  • Internal costs, even though cash stays within your company, might include allocation of resources from one crew to another team for recruitment purposes

Incorporating hiring managers’ payroll costs isn’t essential and may complicate computations. Only include them when you have a particular reason.

External costs

Any “expense caused due to outsourcing companies or individual people during the journey of recruiting” is referred to as an external cost. Here are some of the most common external hiring expenses.

  • Fees for third-party services
  • Posting on a job board
  • Providers of aptitude tests
  • Centers for evaluation
  • Background checks or drug testing
  • Employer branding initiatives such as career fairs
  • Costs of relocation
  • Fees for the Applicant Tracking System (ATS)

Note: ATS is counted among the top 3 HR analytics tools. It creates distinct software links for every job board, procuring exposure, referral, and so on. It then informs you where you found a candidate or at which link they applied for jobs.

If your ATS data indicates that several of your company’s long-term workers came from a specific job platform, you can devote more money and effort to that portal the next time you hire for that position. 

The same could be said if you have candidates with low potential. Now you can devote less money and energy to that one.

Note: CPH calculations exclude any costs incurred after staff members are recruited such as training expenses.

Calculate the time frame

For how long have you been gathering data? 

There really is no single correct response; it varies depending on the purpose of why you are gathering these metrics and also how you intend to utilize it. 

Common timelines involve monthly, fortnightly, and yearly, but you should not be restricted to any of these.

Other connected metrics related to this aspect are time to hire and time to fill. Time to hire is defined as the total time taken by a prospect to apply up the moment s/he accepts the job offer. Time to fill is used to monitor the total time your company’s positions stay unfilled.

Do note that both of the above are important HR analytics – one of the evolving tech trends in the human resource department. These stats utilize substantial data to build predictive plus workable frameworks regarding applicant success and performance.

Complete number of new employees

The complete list of hires may be assessed differently in various companies. However, in general, businesses may include all external or internal hires, as well as full-time workers and part-time workers who:

  • Proceeded via a recruiting process that was overseen by a prospective employer.
  • Were hired as temporary workers and then promoted to full-time positions.
  • Possess over a year’s worth of fixed-term agreements and do not fall within the company’s payroll

Calculations could rule out:

  • Personnel from outside sources such as consultants and contractors
  • Transfers within the organization
  • Employees hired as a result of merger and acquisition
  • Employees who are paid by a third party

CPH according to categories

You can quantify particular cost statistics at your firm to help comprehend and start comparing CPH. Value can be calculated in a variety of ways, including:

  • Position in the workforce
  • Department
  • Level of leadership
  • Source of employment

For example, because designers are in greater demand as compared to financial experts, the CPH in roles in application development could be greater than in finance.

Benchmarks for CPH

Source: Zippia

How would you determine whether your firm’s CPH is substantial, minimal, or normal? 

You could perhaps compare your expenses to available standards.

Here are a few examples of the benchmarks set in the industry: 

  • The starting salary for an employee at the entry level is $3400.
  • 16 percent of yearly wage: the charge of a job paying $30,001 maybe less.
  • 20% of yearly salary: the price of a job that pays $75,000 or even more.
  1. Cost per hire comparable (CPHC)

Another category of cost per hire is CPHC. It utilizes the very same equation but separate data sets. It includes all costs that are fairly commonplace among businesses. 

It contains, for instance, job board service charges but exempts immigration costs.

Recruiting cost rate (RCR)

This is yet another type of cost per hire, which is determined by using the following formula:

RCR = Sum of internal and external costs / Total yearly salary of new hires in their first year of employment

You can include total yearly remuneration before new employees finish one year. In this scenario, total yearly payment will be determined by the number consented during the employee’s contract of employment.

Assume you spend $8,000 on hiring for a role. When  the new recruit’s salary is $50,000, RCR=(8,000/50,000) x 100% =16 percent. It implies that for each dollar your newly hired employee earns, you’ve ended up spending 16 cents to bring them on board. 

The lower this ratio, evidently, the better it is for your corporation. Any HR department would be delighted to gain higher-paid and senior-level employees while incurring lower cost of recruitment.

This metric has the potential to become more effective than CPH. It’s attributed to the reason that it considers market conditions as well as other external attributes, which can influence compensation levels.

Best practices to use data in estimating CPH

Data on the cost of hire could be extremely useful in optimizing your hiring process, such as process development and strategic planning.

  1. Analyze your CPH on a regular basis

You should calculate your expenses on a regular basis in order to measure the effects of a process development, a new tech project, an automation initiative, or a hiring event.

A rise in rates isn’t always a bad thing. For example, it could increase substantially on your investment in expanding recruiting staffing levels to manage higher recruitment volumes.

  1. Examine your expenses by division and position

Compare your CPH data by division and role to focus on areas for continuous improvement. If possible, cost reduction. 

For instance, if the expense of conducting interviews for leadership roles is higher because of several interviews, consider if you can decrease rounds of interviews without negatively impacting the outcome.

  1. Determine your costs based on the hiring sources

Determine which hiring sources are by far the most financially viable. Keeping track of the hiring sources can be performed manually or through your ATS.

  1. Consider your cost in relation to other essential recruiting metrics

Information on CPH should be analyzed on the basis of other hiring metrics which are essential to you, like time to fill as well as efficiency of hire.

If at all feasible, you could perhaps investigate their relationships with one another. For instance, does the cost decline as the time to fill decreases? What tends to happen to hiring quality as costs fall?

  1. Make use of CPH data in strategy development

CPH serves as a crucial component in corporate strategy and budget planning — to decide future investment plans in hiring techniques and enhanced business headcount to measure the recruiting function’s effectiveness.

Conclusion

Determining CPH is really not difficult once you understand the process correctly. Cost monitoring is something you are already doing. Providing extra attention to slight or concealed expenses, either external or internal, will improve recruitment visibility.

It’s worth remembering that CPH serves as only one part of a larger metric conundrum. It’s beneficial, but not sufficient by itself. You should also select the metrics that are most useful to you and strive to view the bigger picture. 

The one and only way to accomplish this would be to avoid becoming obsessed with a single statistic. 

Don’t be put off by the high CPH. It could imply that your hiring procedures are advanced and efficient.

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2022

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