Cost per hire is a vital metric within Human Capital Management, quantifying the total investment an organization makes to onboard a new employee. It encompasses all expenses, both direct and indirect, associated with attracting, recruiting, screening, hiring, and integrating new talent into the workforce. This key performance indicator (KPI) helps businesses evaluate the efficiency and effectiveness of their recruitment processes, contributing to broader cost analysis and strategic workforce planning.
History and Origin
The concept of measuring the "cost per hire" emerged as organizations began to view human resources not merely as an administrative function but as a strategic contributor to overall business profitability. In the mid-20th century, as the importance of human capital gained recognition, there was a growing emphasis on quantifying the value and cost associated with employees. Economists like Theodore Schultz popularized the idea of "investment in human capital" in the 1960s, shifting the perspective of labor from a simple cost of production to an asset that could be developed and optimized.16 As human resources evolved into a more strategic discipline, the need for metrics like cost per hire became apparent to justify HR budgets and demonstrate the return on investment (ROI) of talent acquisition efforts. While a specific singular "origin" for the cost per hire metric is not widely documented, its widespread adoption aligns with the broader movement towards data-driven decision-making in human resources and the increasing sophistication of HR analytics over recent decades.15
Key Takeaways
- Comprehensive Measurement: Cost per hire captures all financial outlays associated with filling a vacant position, from initial advertising to onboarding and initial training.
- Efficiency Indicator: It serves as a key performance indicator (KPI) for the efficiency of an organization's hiring efforts.
- Budgeting and Planning Tool: Understanding this metric aids in better budgeting for future hires and strategic workforce planning.
- Identifies Optimization Areas: Analyzing the components of cost per hire can reveal areas where the recruitment process can be streamlined or made more cost-effective.
- Industry Variability: The average cost per hire can vary significantly depending on factors such as industry, job level, geographic location, and company size.14
Formula and Calculation
The Cost per Hire (CPH) is calculated by dividing the total internal and external recruitment costs by the total number of hires within a specific period.
The formula is as follows:
Where:
- ( CPH ) = Cost per Hire
- ( TEC ) = Total External Costs (e.g., advertising, agency fees, background checks, relocation expenses)
- ( TIC ) = Total Internal Costs (e.g., salaries and benefits for internal recruiters, hiring manager time, HR technology costs, employee referral bonuses, administrative operating expenses)
- ( TH ) = Total Hires (number of new employees hired during the period)
For instance, the Society for Human Resource Management (SHRM) reports that the average cost per hire in the United States is around $4,700, though this figure can be much higher for executive or specialized roles.13,12,11
Interpreting the Cost per Hire
Interpreting the cost per hire involves more than just looking at the final number; it requires understanding the context and what the figure represents for a particular organization. A low cost per hire might suggest an efficient recruitment process, but it could also indicate underinvestment in critical areas that affect the quality of hires, such as thorough screening or competitive compensation. Conversely, a high cost per hire could be justified if it leads to top-tier talent that significantly boosts productivity and long-term return on investment.
Organizations often compare their cost per hire against industry benchmarks or their own historical data to identify trends and areas for improvement. For example, positions requiring highly specialized skills or executive roles typically have a higher cost per hire due to extended search efforts, specialized agencies, and potentially relocation expenses. It's crucial for businesses to align their CPH targets with their overall talent strategy, ensuring that cost efficiency does not come at the expense of hiring quality or employee retention.
Hypothetical Example
Consider "Alpha Tech Solutions," a software development firm looking to hire five new engineers in a quarter.
-
External Costs:
- Job board advertisements: $2,000
- Recruitment agency fees (for two hires): $10,000
- Background checks and assessment tools: $1,500
- Candidate travel/relocation assistance: $3,000
- Total External Costs (TEC) = $2,000 + $10,000 + $1,500 + $3,000 = $16,500
-
Internal Costs:
- Portion of internal recruiter salaries (allocated to this quarter's hires): $5,000
- Hiring manager time (interviews, reviews): $2,500
- HR software subscription (allocated to hiring): $500
- Employee referral bonuses (for one hire): $1,000
- Total Internal Costs (TIC) = $5,000 + $2,500 + $500 + $1,000 = $9,000
-
Total Hires (TH): 5 engineers
Using the formula:
Alpha Tech Solutions' cost per hire for this quarter is $5,100. This figure allows the company to analyze whether their spending is efficient compared to industry averages or previous quarters, and to adjust their budgeting and talent acquisition strategies accordingly.
Practical Applications
Cost per hire is a practical metric used extensively across various industries to manage human capital effectively. In corporate finance, it informs financial statements by detailing a significant component of operating expenses related to staffing. HR departments leverage CPH to benchmark their efficiency, compare different sourcing channels (e.g., job boards versus internal referrals), and optimize their recruitment strategies. For example, if advertising on a particular platform consistently yields high costs without proportionate quality hires, the budget can be reallocated.
Furthermore, businesses use cost per hire when assessing the overall economic impact of their workforce. The Bureau of Labor Statistics (BLS) provides comprehensive data on Employer Costs for Employee Compensation, which includes not just wages but also benefit costs, highlighting the substantial investment in human resources.10,9,8 Understanding the cost per hire helps organizations make informed decisions about scaling their operations, expanding into new markets, or implementing new technologies that might affect staffing needs. Investing in efficient recruitment is critical because the overall success of an organization is heavily tied to its ability to attract and secure the right talent, balancing cost with the future contribution of new employees.7
Limitations and Criticisms
While cost per hire is a widely used and seemingly straightforward metric, it faces several significant limitations and criticisms. A primary concern is its singular focus on cost, which can inadvertently incentivize cost-cutting measures that compromise the quality of new hires. For instance, reducing spending on robust background checks, comprehensive skills assessments, or competitive sourcing channels might lower the cost per hire but could lead to poor hires, increased employee turnover, and ultimately, higher long-term costs due to lost productivity and subsequent re-hiring expenses.6
Critics argue that by emphasizing only the cost component, organizations might overlook more strategic factors, such as the quality of the candidate, their cultural fit, or their potential long-term contribution to the company.5,4 An excessive focus on cost-cutting in any business function, including human resources, can lead to "wrong sizing" and demoralized employees, ultimately hindering strategic objectives.3 It does not inherently account for the time it takes for a new hire to become fully productive, nor does it quantify the opportunity cost of a vacant position. Therefore, while CPH provides valuable insight into recruitment spending, it should always be considered alongside other key performance indicators (KPIs), such as quality of hire, time to fill, and new hire retention rates, to provide a more holistic view of recruitment effectiveness and actual return on investment.
Cost per hire vs. Time to hire
Cost per hire and time to hire are two distinct yet complementary human resources metrics. Cost per hire focuses on the financial outlay, quantifying the total expenses incurred to fill an open position, as discussed throughout this article. It answers the question, "How much did it cost us to bring this new person on board?"
In contrast, time to hire measures the duration of the recruitment process, typically from the moment a job requisition is approved to the point a candidate accepts an offer. It answers the question, "How long did it take us to fill this position?" While a lower time to hire can sometimes correlate with lower costs (e.g., less time spent on advertising or recruiter efforts), focusing solely on speeding up the process without considering quality can lead to higher turnover or poor-fit hires, which paradoxically increases the true cost in the long run. Both metrics are essential for a comprehensive understanding of recruitment efficiency, with cost per hire addressing the financial aspect and time to hire addressing the speed and responsiveness of the hiring process.
FAQs
What is included in the cost per hire calculation?
Cost per hire includes both external and internal expenses. External costs can involve job advertising, third-party recruitment agency fees, background check services, candidate travel expenses, and relocation packages. Internal costs typically cover the salaries and benefits of internal recruitment staff, a portion of hiring manager time spent on interviews, HR technology (like applicant tracking systems), and employee referral bonuses.2
Why is cost per hire an important metric for businesses?
Cost per hire is crucial because it helps businesses understand the financial investment required to grow their workforce. It allows organizations to evaluate the efficiency of their recruitment strategies, benchmark against industry standards, and identify areas where they can optimize spending without compromising the quality of hires. This metric supports better budgeting and resource allocation for talent acquisition.
What is a good average for cost per hire?
The average cost per hire varies significantly by industry, job level, and location. According to SHRM, a common benchmark for the average cost per hire in the U.S. is around $4,700.1 However, executive positions can cost considerably more (e.g., over $28,000), while entry-level roles might be less. The "good" average depends on the specific context of the role and the organization's strategic goals.
Does cost per hire account for a bad hire?
No, the standard cost per hire formula does not directly account for the additional costs associated with a bad hire, such as lost productivity, decreased team morale, or the expense of re-hiring. While CPH measures the initial expenditure to fill a role, the financial impact of a poor hiring decision extends far beyond this initial cost. Companies should track other metrics, like quality of hire and employee turnover rates, to assess the broader impact of recruitment outcomes.
How can companies reduce their cost per hire?
Companies can reduce their cost per hire by optimizing their recruitment process. Strategies include leveraging internal talent acquisition teams more effectively, increasing employee referral programs, utilizing more cost-effective job boards, streamlining interview processes to reduce hiring manager time, and investing in recruitment technology to automate tasks. Focusing on improving employee retention also reduces the need for frequent, costly new hires.