Calculating the Cost-per-Hire
By: Alan Davis
A little knowledge may be a dangerous thing
Cost-per-hire is the most commonly encountered metric in the recruiting arena. It can apply both to internal promotions or transfers, as well as new hires from outside the organization. Unfortunately however, there appears to be no consistent standard of measurement. Making comparisons of cost-per-hire dollar amounts between different organizations can therefore be extremely misleading. The biggest variable is probably the inclusion or exclusion of management time and overhead costs in the calculation. However, on the positive side, internal consistency of measurement within the same organization provides reasonable comparison of one cost-per-hire over another.
Cost-per-hire calculations can get extremely complicated, but the argument can be made that unless they are complex, any over simplification can create extreme inaccuracy. The latest Compensation Planning Outlook published by the Conference Board of Canada calculates the average cost-per-hire as follows:
Equivalent comparisons from other sources, point to extremely different numbers. According to some U.S. sources, the overall average cost-per-hire in the last year has fallen from $4500 down to under $4000. Others report that the cost-per-hire is going up by 2.6% on an annual basis. All of the experts in Cost-per-Hire calculations agree on one thing: that calculating Cost-per-Hire is extremely complex – and inconsistent.
There are other relevant metrics that are seen less frequently, but can be equally important.
Time to Hire
This metric is somewhat easier to measure, however statistics are somewhat harder to come by.
Again quoting the Compensation Outlook 2002 by the Conference Board of Canada, the average time-to-hire has been calculated as:
It notes that these are averages, everyone has heard horror stories of extreme time lines, especially at the executive level where time-to-hire can take from twelve to eighteen months. Also seen at the technical level, where there are often critical skill shortages, the time-to-hire of seven weeks could be viewed as an incredible victory.
“Outside The Box” Metrics
Here are some suggestions of other equally relevant metrics that should be considered when measuring the effectiveness of your recruiting efforts.
The cost of “not hiring” is very hard to measure, but some attempts have been made to provide measurements on a consistent basis. Without a doubt, the costs of not hiring critical employees could be massive. Cost alone may not be the only consequence of “not hiring”. In critical positions like doctors, “not hiring” could result in at least lengthy waiting times in the emergency room, and at worst, the death of a patient who did not receive treatment on time. In the commercial world, the costs of “not hiring” at the management level can also cause side effects like the departure of subordinate staff, who feel the lack of care from above and for whom there are many alternative career options outside the organization that can be pursued.
The quality of hire is perhaps the most critical of all metrics, yet I’ve never seen it measured. Maybe it is simply too difficult to measure!
The cost of hiring a terrible employee can be mitigated fairly promptly. You simply take the appropriate steps to remove the poorly performing employee from the organization, (which can be done relatively quickly and without incurring too much expense) and replace them.
Possibly the worst-case scenario is hiring the marginal performer, who never performs so badly that they need to be fired, but who takes up a disproportionate
amount of management time trying to improve their performance. The worst consequence of course may be that this person can cause high performing employees to quit.
My favorite quote from “The Talent Solution” by Ed Gubman is: “Today, talent is the fundamental resource in business.” Hard to dispute!
Clearly therefore, we need to invest in talent acquisition, and to pay more attention to some of these critical metrics in the recruiting process.
Anybody in the recruiting arena must be cognizant of the cost-per-hire calculation yet, must equally be wary of its’ limitations. It should also be realized that the short cuts in the recruiting and selection process can be devastatingly expensive. Measuring cost-per-hire alone is a massive over-simplification of the business issues involved.
Return on the Recruiting Dollar
Measuring return on investment of the recruiting dollar is much more difficult to accomplish, but is much more meaningful. The direct cost of recruiting a key employee pales in comparison to the amount of benefit that they can contribute to the organization, and the amount of money that they will cost during their tenure. Therefore be very cognizant of the added value of Subject Matter Experts in recruiting, and be wary of handing over responsibility for recruiting talent into your organization to the inexperienced, or the uncommitted. There is way too much at stake to treat this subject lightly.