From The Vaults: Cost Per Hire

On November 2, 2010, in HRExaminer, John Sumser, by John Sumser

Cost Per Hire, From The Vaults on HRExaminerThe HRExaminer archives are a dangerous place to visit. Here’s a decade old piece on the nonesense of using ‘cost per hire’ as a recruiting metric. Still, today, this is the prime measurement in many places.

Ouch.

The idea of adequately planned replacements (non-reactive recruiting) is still taking root but the progress has been slow. Here’s what it looked like in 2000:

Anyone reading this newsletter will be familiar with the ongoing debates about “cost per hire”. Somehow, the unique history of the Human Resources function and the nearly complete absence of basic business education in the industry has conspired to create a narrow view of the relative importance of Recruiting.

  • The sage Saratoga Institute, often seen as the ultimate source of HR thinking, typically describes “cost per hire” as the sum of administrative costs and expenses.
  • Infomart-USA, a hiring practices auditing company, estimates the national average at about $4,400. They consider the following elements of cost per hire: Uniforms, Advertising, Agency fees, Employment fairs, Employment office salary expense, Employment office facility expense, Estimate of time spent in training, Recruiter travel expense, Internal recruiter expenses, Internal recruiter labor expense, Referral Bonus, Recruiting & Training Expense
  • HRLive (which isn’t very) offers five year old data that suggests an average cost per hire nearer to $8,000.
  • American Incite, an odd online Executive Search operation makes a lengthy argument that the base salaries used to calculate the administrative cost per hire is deeply understated. Yawn.

While these overly complex approaches may well capture the number of dollars spent on an average hire, they hardly begin to capture the cost of a hire. Hiring managers, insulated from the nonsense measurements of the HR folks, have a clearer picture. The cost of a hire is the money lost because the hire wasn’t made. Well recognized in MBA programs and broadly understood throughout the rest of the organization, the simple concept is “opportunity costs“.

At its most basic, the opportunity cost associated with a particular hire is the productive revenue lost because the hire wasn’t made. Ask an IT manager with 20% of her desks unfilled whether she cares about the administrative costs in the Recruiting department. Of course she doesn’t. She’s working weekends and late evenings while continuing to miss deadlines. She is experiencing the real cost per hire: revenue lost from employees who weren’t hired.

Here’s an easy way to get your arms around the real cost per hire in your organization:

Take the annual sales of your company (or division) and divide it by the number of employees. This is the annual revenue per employee.

  1. Divide that number by 250 to get the daily revenue per employee.
  2. Multiply daily revenue per employee by the number of days it takes to hire an employee.
  3. If you want, add the dollars spent by the Recruiting Department (it’s a minor fraction).
  4. This is the real cost per hire, generally it’s 5 to 10 times the administrative costs.

This view of “cost per hire” points out the importance of reaching real global standards for reductions in the hiring cycle. Current “state of the art” approaches try to reduce the cycle to under a month. We believe that the real answer is to target a recruiting cycle time of minus 30 days.



 
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