The Importance of Cost Per Hire - analysis of recruitment cost - Brief Article - Statistical Data Included

Workforce, Jan, 2001 by Barbara Davison

This critical metric shows you what you're spending now. Then you'll be better able to do a cost-benefit analysis to decide whether to adopt applicant tracking.

You are absolutely correct if you say that the quality of the hire is more important than the cost.

However, when you're doing a cost-benefit analysis to determine whether to buy an applicant-tracking product, one of the first steps is to figure out what you're spending now.

When large companies hire thousands of employees per year, these costs can take a significant portion of the HR budget and the total operating expenses. Successful start-ups and dot-coms are also feeling the squeeze. Agency fees of 20 to 30 percent of the new hire's base salary have a heavy financial impact when you're adding more than 100 new hires per year.

Whether you are using the new electronic methods or the traditional hiring tactics, having a standard and effective way of measuring your cost per hire is essential to evaluating your recruiting effectiveness and efficiency. The Saratoga Institute includes six basic elements to calculate cost per hire:

1. Advertising

2. Agency and search firm fees

3. Referral bonuses paid to employees

4. Travel costs incurred by both recruiters and applicants

5. Relocation costs

6. Company recruiter costs (including salary and benefits prorated if the recruiter performs duties other than staffing)

These six factors account for 90 percent of the costs to hire. The Saratoga Institute adds an additional 10 percent to cover miscellaneous expense items such as testing, reference checking, bonding, hiring-unit staff time, administrative support and other minor expenses. The internal cost per hire calculation is very similar. It includes four data elements: Any internal advertising costs, travel and interview costs, relocation costs, and internal recruiter costs. The combination of both external and internal hiring costs provides a total cost analysis of your recruiting efforts.

Total cost per hire

In the Saratoga Institute Human Capital Report for 2000 (compiled from calendar 1999 data), the total cost per hire (external and internal hires) for all 991 participants surveyed averaged $4,588. The exempt cost per hire averaged $12,032 and nonexempt $989 (see Figure 1, next page).

External vs. internal for exempt employees

Exempt external cost per hire averaged $8,676 while exempt internal cost per hire hit an average of $15,008 (See Figures 2 and 3). Exempt internal costs are greatly influenced by relocation expenses while the exempt external costs are highly swayed by both relocation costs plus agency fees.

Regional differences

A closer look at the total costs to hire exempt employees shows that higher costs are seen in companies located in the West and for organizations in the computer, pharmaceuticals/medical devices, and manufacturing industries. High nonexempt costs are also seen in companies located in the West. The regional variances can be attributed to several factors: The higher costs of doing business, higher cost of living and therefore higher salary demands, plus the demands of a tight labor market--there are simply more jobs than people.

Costs by source

The total costs to hire are only one element in an effective and efficient recruiting function. Many companies don't measure and therefore don't understand what works for their organization since they're not looking at their costs and hires by source. A breakdown of the 1999 total hiring costs show that on average 18.4 percent of the total hiring cost are allocated to advertising, 19.9 percent were paid to agencies and search firms; only 1.8 percent was for referral bonuses, 2.7 percent for travel costs, 32.9 percent were paid out for relocation expenses, and 24.3 percent were for recruiter pay and benefits (see Figure 4).

The breakdown for external exempt hires shows that close to 50 percent of the costs are allocated to agencies fees and relocation expenses (Figure 5).

When evaluating cost per hire, and considering any changes, the key is to look further. Ask yourself these questions:

* Are you getting what you pay for tight now?

* What is the retention rate for those employees hired from employee referrals vs. agencies?

* What is the average tenure for employees who relocate?

* What level employees are best hired from newspaper advertising?

* What source has provided you with the highest performers?

The costs to hire exempt external employees has risen 25 percent in the last two years. Effective staffing functions use this data to plan successful recruiting strategies that supply them with the quality hires they seek and hopefully slow down that rate of cost increase.

Barbara Davison is a principal consultant with Saratoga Institute.

                    Total Cost per Hire - Internal and
                                 External
Total      $4,588
Exempt    $12,032
Nonexempt    $989
                          External Cost per Hire
Total External $4,882
Exempt         $8,676
Nonexempt      $1,129
                          Internal Cost per Hire
Total Internal  $7,813
Exempt         $15,008
Nonexempt         $720
                       Total Cost per Hire Breakdown
Advertising      18.4%
Agency           19.9%
Referral Bonuses  1.8%
Travel            2.7%
Relocation       32.9%
Recruiter        24.3%
                     External Cost per Hire Breakdowns
Advertising      21.7%
Agency           24.4%
Referral Bonuses  2.9%
Travel            3.7%
Relocation       24.7%
Recruiter        23.6%