There are currently 13.9 million Americans who are unemployed. As of the end of August, the Bureau of Labor Statistics reports there were 3.1 million job openings. That comes out to nearly 5 people for every job that is available. Advertisements for open positions typically yield hundreds of applicants. For employers, this means investing significant time and resources to recruit, select, and on-board new employees.
According to Society of Human Resource Management (SHRM) benchmarking data (2009), the average cost-per-hire across all industries was $1,978. For knowledge based industries, such as information technology, the cost-per-hire jumps to over $3,000. The cost-per-hire (CPH) metric is used to measure how cost effectiveness of an organization’s recruiting operation. In terms of hiring, ideally cost effectiveness is hiring the most talented people in the shortest amount of time for the least expense.
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.
Executives can use the CPH metric:
1. As a benchmark to compare across divisions and externally.
2. To plan the quarterly or annual budget.
3. As an ongoing measurement of the Recruiting function’s performance.
4. As a factor in strategic planning.
Human Resources and Recruiting can use the CPH metric:
1. To measure individual Recruiter performance.
2. As a factor in making recruitment outsourcing decisions.
3. In setting budgets and strategy.
4. To measure overall recruiting process efficiency.
SHRM has proposed a national standard for determining the CPH of organizations, and it is expected to pass by the end of 2011. The standard includes the cost-per-hire metric, internal (CPHI) and the cost-per-hire, comparable formula (CPHC). The latter is designed to allow for comparison between organizations.
The CPHI metric includes expenses related to: advertising and marketing, background checks, campus recruiting, outside consulting services, drug testing, referral awards, relocation fees, travel (candidate and recruiter), recruiting and sourcing staff salaries, and overhead for government compliance. The CPH metric does not include training costs for the new employee or economic loss occurring as a result of turnover or new hire time to productivity.
Although the data set included in the CPHC is not drastically different, the types of costs are significantly constrained so that data included is the most common data companies use to determine their average CPH.
When calculating your organization’s CPH, we recommend dividing the data sets based on employee level: non-exempt and exempt for example. This addresses concerns that the CPH measure oversimplifies the true cost of a new hire. Here’s an example:
An organization hires a total of 15 employees throughout the year. Of these, 12 are non-exempt staff and three are senior-level executives. For the non-exempt staff, the total cost was $12,000; for the executives, the total cost was $500,000. If we used the entire cost of $512,000 divided by the 15 new hires, we have an average of $34,133 per hire. Communicating this figure as our average CPH misrepresents the true picture of what it costs to hire a new employee. Companies would also be using this figure to justify next year’s recruiting budget, and that rationale is flawed. Generally, the need to hire three senior-level executives in one year is an anomaly.
If we break down the CPH data, we can see the more accurate picture emerge: the true CPH for non-exempt was $1,000, while the CPH for senior-level executives was $166,666. Taking these numbers into account in their respective groups gives a company a much more accurate picture of the CPH.
By taking these factors into account, you can more accurately track your CPH and increase the efficiency of your workforce planning process.