One of the most important numbers for business owners to keep up to date is the cost per hire. It’s especially important if you’re operating in an industry with a high employee turnover rate. Also, for upscaling operations and bringing in new staff members.
It's easy to rely on an industry average for the cost of hiring a new employee. However, it's best to run your own calculations, based on the internal and external resources available to you.
Cost Per Hire Definition
Cost per hire is defined as the estimated average expenses of bringing in a new employee. This number is usually a part of a company’s recruitment budget. It primarily dictates how many new hires they can bring in within a single financial year.
The expenses vary greatly depending on the department you're hiring for and the industry. The cost covers a variety of processes and resources. From advertising costs and recruitment outsourcing to referral programs, internships, and training periods, it's all included.
For companies in the tech industry, the average cost per hire can be significantly higher than the local average. That’s because most hires would need in-house training to get accustomed to your company’s internal systems. Furthermore, new hires must be input into the company’s security and access management systems, which takes time. If you’re offering company-issued devices — whether it’s phones, tablets, or laptops — those could also drastically increase the average cost of bringing in a new employee.
You can calculate a fairly accurate cost per-hire estimation using a straightforward equation. Add up the internal and external recruiting costs, then divide them by the number of new hires. For example, you can expect to spend an average of $4,500 per new hire if you bring in 100 new hires on a recruiting budget of $450,000.
How Much Does It Cost To Hire an Employee
The average employer in the U.S. spends almost $5,000 per new hire. This is over a period of 40 to 50 days, from distributing advertisements to going through the vetting, interviewing, and hiring process.
However, looking at an average rarely offers a clear picture, as companies vary in their recruitment practices. Executive recruitment costs can be as high as $28,000 per new employee and can include compensation for visas and relocation.
Costs Per Hire Formula
The cost-per-hire formula estimates the average cost of individual new hires depending on the total amount spent during the recruitment process. However, you can also use it backward. Input the numbers based on your cost-per-hire data to estimate your recruitment expenses.
There are three main elements to the cost-per-hire formula, varying from company to company, and from department to department.
Internal recruiting costs are the added labor performed by your internal staff. The human resources department is responsible for handling the applications and interviews of new hires. However, your IT and tech department would also need to include the new hire in the system. Other internal costs may include referral bonuses. Those tend to save on external job posting costs and recruitment agency fees.
For high-skill positions, internal training may be necessary. You can implement this through communal workshops or by allocating the responsibility to a senior employee with more experience. For cross-country and overseas recruits, relocation and visa expenses may also play a role in the total cost of recruitment. However, for employees in different departments, it’s important to note that the average will vary greatly.
Training is also a critical part of hiring new recruits. The cost depends on the existing expertise of the employee and whether their work will be done in-house or outsourced. There are dedicated companies that train employees for recruitment.
By outsourcing to recruitment agencies, you can further reduce administrative costs and workload. They’d be responsible for filtering through candidate applications and the interviewing process. They only send in the employee for the final stages of approval once everything else has been settled. This is usually done for a fixed fee or a percentage of the employee's annual salary.
If you’re looking to reduce external costs, you can post your own ads on job boards and hiring sites like LinkedIn, Indeed, SimplyHired, and ZipRecruiter. For high-traffic and high-credibility employment sites, the cost can depend on your company, the job for which you're hiring, etc. You should also expect to republish the same posting one to two times, as recruitment times tend to vary.
Smaller companies and startups sometimes post job openings on social media. This can be done either for free or through sponsored postings on Facebook, Twitter, or Instagram. This may reduce your external costs, but it’s incredibly difficult to scale and inflate internal costs.
Total Number of Hires
How many people you can expect to hire in a single financial cycle depends on multiple factors. For one, the turnover rate in your industry. The local and state education sectors had the lowest turnover rates at 18% in 2021, according to the U.S. Bureau of Labor Statistics. Meanwhile, the leisure/hospitality and retail sectors had an estimated 84.9% and 64.6% turnover rates, respectively.
The median tenure length also plays a role. It influences whether you’ll be renewing your existing employees’ contracts or bringing in new hires. On average, men’s tenures are around 4.3 years, while women are a little shorter at 3.8 years, according to the U.S. Bureau of Statistics.
The number also corresponds to the size of your company, as larger companies tend to hire more within a single financial year. However, expanding or launching a new project can also increase the number of new hires.
Cost Per Hire Calculation Example
In the following hypothetical scenario, a company is looking to hire a new software engineer, estimating how much it’d cost based on the average costs of training and onboarding employees.
The internal costs include, but aren’t limited, to:
- Application management and interview: $400
- Training: $1,100
- System onboarding: $800
- Job board posting: $450
- Recruitment agency fee: $3000
In this scenario, you can expect to hire a software engineer for just under $6,000. Considering the average salary of an entry-level software engineer in the U.S. is around $80,000, this cost per hire results in a Recruitment Cost Rate of 7.5%. If there's still uncertainty on this, you can try our software engineer budget calculator.
Additional Recruiting Metrics
Cost-per-hire data is one of many recruiting metrics that you should watch closely. Some of these include:
- Employee retention rate
- Quality of hire rate
- Salary offer acceptance rate
- Application completion rate
- Interview completion rate
- Ratio of open positions to received applications
Cost Per Hire Comparable (CPHC)
The Cost per Hire Compatible (CPHC) is another way of measuring the average hire cost of a new employee. This excludes additional costs, such as relocation, visa, and immigration expenses.
CPHC allows you to better compare your results to other companies and businesses in your industry and size.
Recruiting Cost Rate (RCR)
The Recruiting Cost Rate (RCR) is a percentile approach to calculating the cost per hire. This is done by combining the total internal and external recruitment costs and dividing them by the employee’s first annual salary. The RCR compares how much you spend on the employee and the value they make based on their annual compensation.
Why Costs Per Hire is Important for Your Business
Having an accurate estimate of your company’s cost per hire enables you to set a more appropriate recruiting budget at the beginning of the financial year. Failing to do so might leave you understaffed and with little to no funds available to recruit new employees.
It’s also essential when opening a new internal department or upscaling operations for a larger customer demographic. Bringing in a large number of recruits during a short time period is energy- and cost-intensive. A part of the investment should go toward the recruitment budget as a priority expense.
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