Cost per Hire has become increasingly important for companies in terms of employee acquisition. The term describes the costs incurred per new hire and represents a significant criterion for the monetary effort of recruitment. This metric helps make better strategic decisions when it comes to attracting new workforce. This article explains what Cost per Hire is, why it is important, and how you can calculate and minimize it.
What is Cost per Hire?
Cost per Hire refers to the expenses a company incurs for the individual recruitment of a new employee. It encompasses all costs incurred during the hiring process. This metric is one of the most important reference values in the context of personnel costs and recruitment. Specifically, it analyzes the relationship between monetary investments for recruitment and the positions to be filled. By measuring Cost per Hire, you can compare annual hiring costs, identify fluctuations, and make changes to reduce expenses if necessary.
KEY POINTS
- Cost per Hire is a key factor for assessing and controlling recruitment costs.
- The calculation includes the total of internal and external recruitment expenses divided by the total number of hires.
- A reduction of Cost per Hire can be achieved through digitalization, employer branding, and the use of freelancers.
How is Cost per Hire Calculated?
Cost per Hire = internal and external expenses for recruitment / total number of hires
The calculation of Cost per Hire considers a variety of investments for personnel recruitment, both internal and external expenses. The value is determined by adding up all expenses and dividing the result by the number of successful hires. From targeted personnel marketing to the costs of training recruitment employees, to expenses for external recruiters, the hiring costs that make up Cost per Hire vary. Accurate calculation requires a range of data.
How Is the Cost per Hire Made Up?
Cost per Hire consists of financial means for internal and external expenses.
Internal Costs
Internal investments include:
- All expenses for designing candidate profiles
- Expenses for applicant interviews
- Events for employee recruitment
- Employee referral programs
- Training for recruitment employees
Internal costs include all investments made for creating job profiles and advertisements. Here, the costs for the time spent play a particularly important role. The costs for interviews with potential employees are also significant. For special events where personnel acquisition also took place, the corresponding expenses can also be included in the cost determination. Expenses for employee referral programs for recruitment, to promote the employer image, and for training measures for HR employees also count as internal costs that determine the Cost per Hire.
External Costs
External expenses include costs not caused by internal employees:
- Advertisements in both print publications and online ads
- The use of specialized recruitment programs
- The use of recruitment agencies
- Expenses for background checks
- Expenses for travel costs
All these internal and external expenses make up the total hiring costs. To determine the Cost per Hire from this, divide these costs by the total number of hires in the company.
Average Cost per Hire in Germany
Ø 4,700 € per new hire for employees without decision-making authority
Ø 10,000 € and upwards for executives
According to a study by the Institute for the Study of Labour, the average hiring costs in Germany amount to 4,700 Euros per employee. A survey by Xing E-Recruiting GmbH & Co. KG found that half of the German companies surveyed invest 10,000 Euros or more in hiring managers and decision-makers. Additionally, it was found that hiring processes in most cases take longer than three months.
Not only does the recruitment of new employees lead to expenses. Vacant positions can also cost companies significantly. You can determine the costs caused by an open position with our Cost of vacancy calculator.
Minimize Your Cost per Hire With Qualified Freelancers!
Why is a High Cost per Hire Problematic?
- Indicates inefficiency in recruitment measures.
- Points to the need for improvement in the use of financial resources, time, and personnel.
- Strains the company’s budget.
- Leads to competitive disadvantages.
- Hinders rapid growth and adaptability of the company.
A very high value for calculated hiring costs can indicate inefficient recruitment processes in a company. If the costs of hiring employees are too high, it often means that more resources than necessary are being invested to find the right talents. Money, time, and personnel are probably not being used effectively, and resources could instead be used for other business-critical activities. Excessive recruitment costs also pose a financial burden for companies. They can harm the economic health of a company, especially small and medium–sized enterprises with limited resources.
A high Cost per Hire can also come with competitive disadvantages. If other companies in the same industry or region are able to hire qualified employees at lower costs, they may be more competitive in the labor market. Moreover, inefficient recruitment measures hinder companies from growing quickly and adapting. If it takes too long to find the right employees, it impedes growth and flexibility.
Why It's Important to Measure Hiring Costs
- Provides insights into inefficiencies of recruitment measure.
- Delivers facts to identify cost factors and optimize recruitment processes.
- Grants insights into proven and cost-effective methods for employee recruitment.
- Creates a basis for improved use of resources.
Measuring hiring costs helps identify inefficiencies in recruitment processes and analyze expenses. By calculating Cost per Hire, major cost factors can be identified and recruitment procedures optimized. Companies should monitor expenses to avoid losses and capitalize on improvement opportunities. Comparing expenses between departments can identify cost-efficient recruitment methods. Minimizing hiring costs increases recruitment efficiency, conserves resources, reduces budget strain, and boosts company profits.
How Can Costs per Hire Be Reduced?
- Improvement of recruitment measures through effective project management
- Digitization of recruitment processes
- Employee referral programs
- Employer branding
- Use of free job board
- Video chat interview
- Using social media for employee acquisition
- Employment of freelancers
Optimization of Recruitment Measures
You can reduce hiring costs by improving the selection process. For instance, using standardized evaluation criteria ensures an objective assessment of candidates. A more suitable filtering of candidates through refined application and selection procedures is also possible.
Automating Recruitment Processes
Automating recruitment processes through digitization of procedures is a wise option. If the company lacks digital competencies, external service providers can be involved.
Employer Branding
Employer branding helps to set unique selling points and appeal more strongly to potential employees. Sometimes, only minor nuances make the difference in distinguishing oneself from competitors.
Employee Referral Programs to Reduce Cost per Hire
Employee referral programs have also proven effective in practice with attractive benefits. Some employees have contacts to suitable candidates who can be found through these networks.
Utilizing Video Chats and Social Media
To reduce travel expenses, interviews can be conducted via video chats. In today’s world, social media platforms are increasingly used to find qualified workers. Posting on these channels is free and companies can present an appealing image through profiles.
Incorporating Freelancers
Engaging freelancers is sensible to reduce hiring costs and losses due to open positions. They are quickly available, bring expertise, and do not require social security contributions.
Posting Job Offers on Free Job Boards
Another option is to use job boards that do not charge for posting job advertisements. There are several platforms that offer such an option.
Conclusion
Cost per Hire can be reduced through various measures. By implementing actions such as posting job offers on free job boards and effective employee referral programs, you can reduce the cost per new hire while simultaneously ensuring that qualified and suitable candidates are hired in the company. Reducing Cost per Hire is a desirable goal as it contributes to increased efficiency and improved profitability of a company. The use of freelancers can also be sensible. Depending on the area, they bring valuable skills and can make hiring full-time employees unnecessary.
Cost per Hire is a metric in human resources that represents the financial effort required to hire a single employee.
To calculate the hiring cost per employee, add up all internal and external expenses like personnel costs for creating job profiles and divide the resulting value by the total number of successful hires.
You can reduce your Cost per Hire by improving and digitizing recruitment measures as well as through good employer branding.
