Cost per hire: How to reduce hiring costs

Finding and hiring the right people is a difficult endeavor, and yet crucial for running a successful business. Not to mention that recruitment is a major cost center for companies that needs to be managed effectively to make sure that the money allocated to find new talent isn’t wasted.

Benchmarking data from the Society for Human Resource Management (SHRM) shows that the average cost per hire is nearly USD 4,700. With recruitment costs being so high, it’s little surprising that many employers are wondering how to reduce the cost of recruitment in their company.

In order to reduce recruitment costs, businesses first need to understand what goes into the cost of hiring an employee and what their average cost per hire is. Let’s look at how the average cost per hire is calculated and how it can be reduced in the long run.

Cost per hire is an important metric in hiring and recruiting since it describes the total cost a business incurs when hiring a new employee. The cost of hiring an employee includes both external recruitment costs such as fees for job advertisements and internal recruitment costs such as the salaries of the members of the HR team charged with hiring and recruiting.

Calculating cost per hire means summing all internal and external hiring costs and dividing this sum by the number of hires. The reference period for which recruitment costs are added up and hires counted can be chosen individually, but it should be long enough to be representative of the business’s hiring and recruiting processes. For instance, cost-per-hire calculations could be made with regard to a period of one year.

Internal recruitment costs include:

• Wages and salaries of the talent acquisition and recruiting team

• Wages and salaries of the hiring manager involved in the process (prorated according to the amount of time spent on the actual hiring process)

• Wages and salaries of the payroll team for the time needed to add new hires to the payroll

• Cost of providing training and education to the recruitment function

• Cost of employee turnover in the hiring and recruitment department 

• Wages and salaries of the HR team for the time spent on sorting out the paperwork for new hires and managing the onboarding process

• Cost of training new employees to prepare them for their role

• Cost of additional incentives to attract new talent such as sign-on and referral bonuses

External recruitment costs include:

• Fees for posting job adverts on job boards and online platforms

• Paid social media ads for job postings

• Costs of employer branding (e. g. social media campaigns or PR activities)

• Cost of an ATS (Applicant Tracking System)

• Cost for running background checks on potential candidates

• Fees for contracting an external recruiting agency or headhunter to help with talent sourcing

• Cost for organizing candidate assessment centers

• Other logistical costs linked to the interview process

Calculating the average cost per hire allows businesses to gain a deeper understanding of their expenses related to their hiring and recruiting practices. Knowing how much is spent on recruitment both internally and externally is crucial to understanding what the main cost factors are and what options there are to reduce recruitment expenses. 

Gaining detailed insights into the costs involved in attracting and recruiting new talent further allows for better budgeting. Having a realistic budget to work with takes the pressure off talent acquisition and recruiting teams so that they can focus on their core duties instead of worrying about how to attract great talent with a restricted budget.

The cost-per-hire metric can also reveal inefficiencies in the hiring and recruiting process and pave the way for optimizing recruiting practices and spending money on the more important parts of the hiring process.

Now that we know what cost per hire is, how it is calculated and how knowing their average cost per hire can help businesses optimize their recruitment practices, it’s time to think about possible ways to reduce the cost of hiring a new employee. Here are ten different strategies to get there.

Use employee referrals

Employee referrals are an efficient and cost-effective way to find new talent, since they allow businesses to spend less on job board advertisement and employer branding initiatives—after all, even the best employer branding can’t beat a direct recommendation by one of the business’s employees.

One way of incentivizing employees to use their professional and personal network to spread the word about open positions among their connections is by offering a referral bonus. Of course, providing existing workers with a great employee experience is equally important.

Reduce employee turnover

A simple way of reducing hiring and reducing costs that is often overlooked is to improve employee retention. Employee turnover costs businesses a lot of money. According to Employee Benefits News (EBN), the costs for replacing an employee amount to around $15,000. If the business has a low employee turnover rate, the recruitment function only needs to fill positions that are newly created. And the less positions have to be filled, the lower the hiring costs will be.

Optimize employee training and onboarding programs

Cutting back on professional training is not recommendable, especially since new hires need to be properly prepared for their new role. But there are ways of making new employee training and onboarding programs more systematic. For instance, developing a detailed employee onboarding checklist that is reused for each new hire can increase the overall process efficiency.

Consider outsourcing

Outsourcing hiring and recruiting is a popular strategy for reducing recruitment costs. Depending on business size and the number of hires per year, it may be more cost-effective to outsource the task of recruiting new talent to an external agency rather than working with an in-house talent acquisition and recruiting function.

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Optimize job descriptions

Job descriptions not only need to be clear and concise, but they also have to be on point when it comes to what applicants will have to bring to the table in order to be successful. The clearer the expectations regarding qualifications, experience and skills, the fewer unqualified candidates will apply and the lower the number of CVs the HR team needs to screen. In the end, optimizing job descriptions reduces the overall time spent on applicant screening. 

Use social media

Social media platforms are an increasingly popular outlet for businesses to advertise their open positions. So-called social recruiting works faster than recruiting via traditional job boards and is also a lot cheaper. Plus, if the business can motivate its employees to reshare their job advertisements across their own social media accounts, the click rate is likely to be much higher. Not to forget that sharing increases the post’s reach, which means it will be seen by a lot more potential candidates.

Focus on quality instead of quantity

It’s not always necessary to attract a large number of candidates to fill an open position. In fact, businesses that are looking to reduce their recruitment costs should focus on attracting a small number of qualified candidates. This way, they will be able to reduce the time needed for screening CVs and interviewing candidates, which will make the entire hiring process quicker and more efficient.

Leverage automation in the hiring process

Automation is key when it comes to reducing manual work and optimizing workflows and processes. What holds true for payroll automation also goes for automation in hiring and recruiting. There are many different technologies available that can automate parts of the hiring and recruiting process, including CV, reference and background screening and the use of recruiting chatbots. And since these tools generally cost less than the wages and salaries of hiring and recruiting managers, leveraging technology is a good way to reduce recruitment costs.

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Create and maintain a talent pool

Even if candidates are not chosen for a particular position they applied for, it’s always a good idea to store their information somewhere if they were promising otherwise. Who knows, they might be a good fit for another position with the company that might open in the future. Creating a well-organized candidate list means spending less on job advertising in the long run.

Build a strong employer brand

Building a strong employer brand should be part of any business’s long-term recruitment strategy. That’s because creating a good reputation as an employer will make the business more attractive to potential candidates. This means that the number of applicants that are interested in working with the company will increase without any additional efforts from the talent acquisition department.