As American professor and statistician W. Edwards Deming once said, “In God we trust; all others bring data.” There is no substitute for accurate knowledge when it comes to your company’s business strategy. As we discussed in a previous blog, determining the true cost-per-hire can be challenging:
Many who use the metric internally have struggled with the difficulty in comparing their CPH metric with those of other companies. The data used as a factor in calculating the CPH varies: some companies include recruiting staff salaries, while others do not, as an example. While the metric has limitations because it does not account for other factors in making recruiting decisions such as time to fill, new-hire quality, or measuring overall satisfaction (hiring manager and candidate), the data is useful.
In February, the Society for Human Resource Management (SHRM) and the American National Standard Institute (ANSI) jointly approved the first national standard for cost-per-hire. According to the published documents, the tool “Is designed as a tool to allow an organization to determine accurate and comparable costs of recruitment through a standard algorithm to calculate the recruiting costs to be incorporated into cost-per-hire.”
The Standard covers three types of cost-per-hire formulas:
- Cost-Per-Hire, Internal (CPHI) – This metric is designed for use within a particular organization. It is not intended to provide a method to compare data with another organization. It provides a comprehensive measure of cost and hire data in the organization.
- Cost-Per-Hire, Comparable (CPHC) – This metric uses similar methodology to the CPHI, but includes a subset of data that is more likely to be used across organizations, and is helpful in building strong comparisons of costs between different organizations.
- Recruiting Cost Ratio (RCR) – This metric compares the total cost of hiring against the total compensation of the new hire for the first year of employment. It varies from the other two measures only in the denominator: the CPHI and CPHC are ratios of total costs to the number of hires; the RCR is a ratio of costs to total first-year compensation for new hires.
The formulas for the CPH measures are identical:
(Sum of External Costs) + (Sum of Internal Costs) / Total Number of Hires in a Time Period
As mentioned in the definition, however, the CPHC metric uses a constrained subset of data that is more likely to be used across different organizations. Costs such as consulting services, contingency fees, immigration expenses, pre-hire health screens, pre-screening fees, relocation fees, sign-on bonuses, internal overhead, and secondary management costs are included in the CPHI, but not the CPHC.
The RCR is expressed as a percentage:
(Sum of External Costs) + (Sum of Internal Costs) / (Total First – Year Compensation of Hires in a Time Period) X 100
The scope of the RCR includes the defined costs of the CPHI metric as the numerator. The denominator represents the sum total of first-year compensation for hires that occurred during the time period being measured. SHRM and ANSI recommend selecting a “system of record” that will be consistently used as a source for this data.
Additionally, the standard documents outline data collection methodology that must be followed to ensure data integrity: data set is representative; data source is transparent; errors are minimized; and periodic audits occur on data input.
The establishment of a standard for Cost-Per-Hire, and its use by HR professionals, should lend more credibility to the assertion that HR professionals have earned a seat at the strategy table.
For more information about the ANSI/SHRM CPH metrics, click here.