Cost per Hire – Meaning, Formula, and Calculation

Companies in today’s competitive job market tend to pull in the most capable people available at a reasonable cost to optimise their hiring process. One metric at the heart of this balance is the cost per hire. This figure represents not only the financial investment in bringing new employees on board but also allows organizations to judge the efficiency and effectiveness of the recruitment strategies utilized.

In this blog, we’ll explore what cost per hire means, how to calculate it, and most importantly, how understanding and managing this metric can drive smarter, more cost-effective hiring decisions. Whether you’re a seasoned HR professional or a startup founder, this guide will provide valuable insights to help streamline your recruitment process.

What is Cost Per Hire?

Cost Per Hire (CPH) is one of the most important metrics measuring recruiting effectiveness through the assessment of the financial efficiency of hiring efforts by organisations. It refers to the total cost incurred by an organisation to hire a new employee, involving all the costs about the recruitment process. By calculating CPH, companies can better understand how much they are investing to bring new talent into their workforce and identify potential areas where they can optimise recruitment costs.

The components of CPH can include various stages and activities associated with recruitment, such as:

• Job Opening Advertisements: The costs related to postings on various platforms and company websites. This may also include any sponsored or paid advertisements used to increase visibility.
• Recruitment Agency Fees: If a company engages with third-party recruitment agencies to help find candidates with commission, or retainer fees, which will contribute to the overall cost.
• Background Checks and Assessments: Any additional costs related to screening potential hires, such as background checks, drug tests, or skills assessments, will also factor into the CPH.
• Interview Costs: Travel, accommodation, or meal expenses for candidates who need to come in for interviews or assessments are part of the CPH calculation, especially for senior or out-of-town candidates.
• Employee Onboarding: The costs associated with onboarding a new hire, including orientation, training materials, and initial setup costs (e.g., equipment, software), also contribute to the overall hiring expenditure.

Why is Cost Per Hire an Important Metric?

The Cost Per Hire is important because it allows organisations to understand the cost they should incur before recruiting a new talent. Generally speaking, from advertising, recruitment agencies, HR staff, among others direct and indirect costs resulting from the recruitment process, it gives an all-round insight of how effective hiring is. Indeed, tracking this metric will allow the organisation to determine whether its recruited personnel is cost-efficient and has effectively utilised its resources in the recruitment process.

What is the Formula for Cost Per Hire?

The standard formula to calculate Cost Per Hire (CPH) is:

Cost Per Hire=Total Recruitment Costs / Number of Hires

Where:

• Total Recruitment Costs refers to all the expenses incurred in the hiring process for a specific period, including both direct and indirect costs.
• Number of Hires is the total number of employees hired during the same period.

What is the Cost Per Hire in Recruitment?

Cost Per Hire in the context of recruitment is the expenditure an organisation incurs to hire a new employee. This includes all those costs directly and indirectly incurred during the recruitment process. Examples include:

• Advertising Fees:  Advertising jobs on websites like LinkedIn, Indeed, or a company website
• Recruitment Agency Fees: Fees to third-party agencies who source the candidates
• HR Team Salaries and Benefits: The cost of all of the internal HR teams working on recruitment
• Technology Fees: Fees concerning recruitment software such as using an Applicant Tracking System (ATS).
• Interviewing Costs: The cost involved in interviewing candidates.
• Background Checks Costs: The cost of conducting reference and background checks for the applicants.
• Onboarding Costs: Orienting and training the newly employed personnel.

CPH helps an organisation determine its efficiency in the recruitment process and if the costs incurred in hiring lead to obtaining quality staff members. These costs can be further divided into internal and external costs.

What Is Internal Recruitment Cost?

Internal recruitment cost usually consists of the following:

• HR and Recruiter Salaries:  The salaries or wages of the HR personnel and recruiting managers, who manage the recruitment process procedures, include advertising, interviewing, and putting newcomers into employment. Apart from that, this also includes any people within your organisation who are interviewed or assessed, whose time will be counted as an internal cost to the business.
• Internal Recruiting Technology: Costs related to hiring tools or systems of application within the organisation, such as Applicant Tracking Systems (ATS), portals to internally apply for a job, or other software used in controlling the recruitment process. It can include software licences, subscriptions, or maintenance of systems that accommodate sourcing, tracking, and candidate management.
• Employee Referrals: Incentives or bonuses to the employees within the organisation if internal referrals lead to hired candidates. While the program must be cost-effective as a recruitment methodology, pay to internal recruits for referrals forms part of the cost of internal recruitment.
• Onboarding and Training: Whereas technically part and parcel of employee introduction, onboarding resources form a severe component of internal costs. These include the onboarding software, materials used in training, and time that managers and HR staff spend orienting new hires. If internal staff are assigned to coach or train the new ones, their hours and associated costs (like team bonding and welcome packets) tally up as internal costs.
• Job Descriptions and Internal Communications: Time spent by the in-house teams in writing job descriptions and inter-case transmittal and coordination with other departments is another concealed internal cost also. Internal Recruitment Process Posting job vacancies can be also expensive in terms of internal time and effort spent by staff members
• Interview and Meeting Costs: Time is allocated by internal employees (hiring managers and members of the team) for interviews. This includes setting up and executing interviews, as well as post-interview follow-ups.

Internal costs are not direct financial expenses but time spent by personnel inside for discussions pertinent to recruitment.

How do you discover hidden internal costs in hiring?

While some internal costs may seem obvious, such as HR salaries and recruitment software, others will go unnoticed and less apparent.

Here are several ways to identify hidden internal costs:

• Employee Time Spent on Recruitment Tasks: Conduct an internal audit of the time it takes for the HR staff and hiring managers to spend on each stage of the recruitment process: job postings, reviewing resumes, interviewing candidates, and onboarding new employees. Time of other employees in interviews or evaluations should also be considered. Measuring the employee time that is put into hiring will also allow one to know how much internal resources are being consumed in the hiring process.
• Review of Recruitment Software and Tools: Evaluate the internal costs incurred in any recruitment technology implemented, including ATS, scheduling tools, interview tools, and any application software that supports recruitment. Ensure all tools are utilised to their maximum capacity; unused or unnecessary tools are ‘hidden internal costs’.
• Internal Communications Costs: Account for the employees’ hours to prepare job descriptions, place in-house job adverts, create internal communications, and follow up on applicants’ queries.
• Not-so-visible cost drivers involve inefficiency of in-house communication: Circulation of job descriptions for approval, amongst other inefficiencies, time spent coordinating communication between departments.
• Monitor your Employee Referral Programs: If your business relies on employee referral programs, account for all costs incurred for referral bonuses in your recruitment budget. Track the effectiveness of these programs to ensure they represent value relative to costs incurred.
• Indirect Interview and Assessment Costs:  Account for indirect time employed by employees to review resumes, interview, and assess candidates. Look for inefficiencies, such as unnecessary rounds of interviews, too many panel members attending to interview candidates, or overly complicated processes to assess candidates, which might be driving internal expenses.
• Cost of Onboarding and Training: Calculate the time and resources utilised in the onboarding process. Consider the cost of onboarding software, employee training materials, and the internal staff time needed to guide the new hires through their first days. Inactive onboarding processes or weak training systems can be ‘hidden’ costs that devalue internal resources.
• Consider Internal Overhead Recruitment Costs:  Most internal recruitment costs depend on operational overhead in terms of office space use or IT services providing support for recruitment tools. If recruitment occurs at peak times or when there is an increased demand for office space, these costs will not be so obvious. Consider the sorts of recruitment activities that consume too much space in the office or use too much machinery.
• Inefficiencies in Recruitment Processes: Consider general process efficiency in your recruitment process. Where steps or stages in the process are consistently over-allocated in terms of time, resources, or personnel, an unconscious internal cost may end. Look for bottlenecks in the process, such as delays in feedback loops or repeated re-interviews, which could be wasting internal resources.

What Are External Costs?

External costs in recruitment are those expenses that occur when an organisation subcontracts the hiring process and gets the services or resources from outside players or third parties. These costs will not be internal and must do more with external vendors, platforms, or services outside the organisation. These will drastically affect the overall Cost Per Hire and depend strictly on the methods and tools used to attract and secure new talent.

What Are the Common External Costs Associated with Hiring?

Following are some of the most common external costs of hiring:

• Job Advertising Costs: Costs for posting job openings on external job boards such as Naukri, LinkedIn, Monster, Indeed, career websites, or social media. Job postings, featured ads, or sponsored job listings have fees, especially for high-visibility or premium ads.
• Recruitment Agency Fees: Fees are paid to a recruitment agency or head hunter to deliver applicants. These may be contingency fees, where the agency earns a fee if it provides a candidate, or retainer fees, whereby the company pays for the recruitment service, up-front, in advance of anything happening. Again, these can vary from agency to agency depending on their experience, the level of the position being recruited for, and whether the agency is working under a short-term or long-term contract.
• Executive Search Fees: Executive search firms take up high-level, senior-level positions, for instance, C-suite or directors. These firms are usually quite pricey. Their fees range as a percent of the candidate’s first-year salary, and the cost related to such executive search firms is pretty high.
• Employee Referral Program Costs (External): The employee referral program has to be managed from within, but organisations provide many different external referral bonuses for employees who find candidates outside the organisation. Some companies hire third-party platforms that run or market their referral programs, which may include added costs.
• Background Checks and Pre-Employment Screening: Expenses for third-party firms to do background checks, criminal record checks, and pre-employment testing such as drug tests, psychometric tests, and other skills assessments.Many organisations outsource this to third-party vendors to guarantee thorough and unbiased screening.
• Recruitment Software and Job Board Subscriptions: Third-party Recruitment software, Applicant tracking systems, job boards, or even career site subscriptions-its fees. Many of the services attract recurring charges, which could be charged on a per-user basis or per-job posting, depending on the size and scope of the organisation.
• Career Fairs and Job Expo Fees: Organising external job fairs or recruitment expositions to advertise available jobs and attract talent. This can include booth renting, promotional materials, travelling expenses, among other related costs. Companies usually incur costs for virtual career fairs in which they pay to have their job openings featured in virtual events.
• Advertising and Recruitment Marketing Campaigns: Hiring external marketing agencies or media companies could help in branding campaigns, job advertisements, or targeted recruitment marketing to attract the required candidates. The costs include video content, digital marketing ads, print materials, or branded social media campaigns.
• Engagement of Consultants: There might be hiring consultants who can optimise their hiring strategies with assistance from the company for refining processes or providing additional support when such voluminous hiring is involved. These consultants can be engaged for a specific project and paid by the hour or, more likely, engaged in a longer-term contract.
• Outplacement Services:  Depending on a company’s decision to downsize or terminate workers, this requires using an outplacement service- an external agency that provides career transition counselling for those employees who need alternative employment.

These services, though primarily utilised during downsizing, are also an important external cost in the recruitment phases where the hiring and firing cycles are closely aligned.

What is a Good Recruiting Cost?

A good recruiting cost must fit into the value of the hire and available budget. It also has to ensure the efficiency of the process. Ideally, the price per hire varies depending on the complexity of the role, industry, company size, and geographic location. Here’s a breakdown:

The cost of recruitment can vary quite significantly from one industry to another in India, with the complexity of roles played by others. Here is an analysis broken down by Indian recruitment trends:

Industry Benchmarks:

In India, the average cost per hire is about ₹20,000 to ₹50,000 across most industries though higher for more specialised roles.

For example, in  key sectors such as IT, technology, and healthcare, there is a huge demand for talent. In that case, CPH would be about ₹1,00,000 or more. For others that are very conservative or of low skills like manufacturing or retail, it may be much more limited, even within the ₹10,000 to ₹20,000 range per recruitment.

Using job portals or social media might be cheaper in some industries when the recruitment landscape moves towards digital platforms.

Role Complexity:

More complex roles, such as those with skills in demand, like software engineers, data scientists, or managerial positions, will also result in higher recruitment costs.

Headhunting, assessment centres, and rounds of interviews usually take up more time and money. Roles of such types  involve spending money on executive search firms or recruitment agencies that function in specific niches, this will be more expensive at ₹75,000 to ₹1,50,000. Entry-level customer service, sales, or retail positions have much lower recruitment costs as the hiring process is relatively shorter and relies more on job portals, campus recruitments, or referrals.

Location-based Influence:

Location is the most critical factor determining recruitment costs in India. Major metro cities like Delhi, Mumbai, Bengaluru, Chennai, and Hyderabad, the competition is keen to attract talented professionals, and hence the costs are pretty high.

Additionally, tier 2 and tier 3 cities will have a lower recruitment cost since the level of competition for talent is lesser and the salary expectations normally would be lower. Recruitment in these locations may involve more localised sourcing and brand-building.

For remote working jobs, an organisation can further reduce recruitment costs by looking at talent pools beyond geographies.

Campus Recruitment: 

Campus recruitment is one of the most crucial factors in increasing the level of efficiency in the recruitment of entry-level jobs. Hiring cost goes down by a considerable amount with charges usually between ₹10,000 and ₹20,000 per candidate.

Employee Referral Programs:

Most Indian companies use “employee referral programs.” This will save recruitment expenses significantly, especially on mid-level positions, due to the speedy and cheap nature of the hiring process compared to external recruitment.

Portal and Social Media Recruitment: 

This method is cost-effective, especially for generic and non-technical positions, for large numbers. Naukri.com, LinkedIn, Indeed, or even Internshala are examples of such portals. Premium service or advertisement on these will be more expensive.

Concisely, the recruiting cost in India is optimal when there is a balance between talent demand and resources so as to be within industry standards of costs, role complexities, and region dynamics. There is also a need to take into account their requirements for a particular skill set of the role, the location of the recruitment process, and the hiring strategy selected (online job portals, campus recruitment, referrals, or headhunting).

What is Cost-Per-Hire Comparable (CPHC)?

Cost-Per-Hire Comparable (CPHC) is a variation of Cost Per Hire (CPC). It compares a company’s hiring costs with the costs of an industry’s standards or benchmarks. CPHC is an application that will calculate the position that an organisation’s recruitment expense takes among other companies belonging to the same industry or sector. Therefore, this metric will yield a more context-specific comparison, since it points out whether the hiring processes of the organisation are somehow costlier than the industry norms.

How can you make use of CPHC to benchmark against industry standards?

You can use CPHC to benchmark against industry standards, gathering data on average hiring costs in your industry or sector-mostly as sourced from industry reports, HR associations, or recruitment surveys. Using this information, you will be able to compare your organisation’s CPH with the average for the industry. Industry-standard CPHC could be an indication of inefficient or overly expensive recruitment and may need reviewing of channels, technology, or strategy.

Benchmarking with CPHC would allow organisations to make proper decisions about their recruitment strategy and modification of budgetary allocations, aiding in streamlining their processes and reducing costs but without compromising the quality of hire.

What is the Recruiting Cost Rate (RCR)?

Recruiting Cost Rate refers to the absolute recruitment costs compared as a percentage of the company’s total payroll or revenue. It gives an impression of an organisation’s total cost for recruiting purposes against its overall financial structure. RCR covers all costs attributed to recruitment, such as advertisements, agency fees, employee-referral bonuses, and staff costs placed internally (i.e., salaries of HR). RCR is generally expressed as a percentage.

How is it Different from Cost Per Hire?

While Cost Per Hire (CPH) focuses on the total costs incurred in hiring a single candidate, Recruiting Cost Rate (RCR) focuses on the cost of recruitment relative to the magnitude of the organisation. CPH is a per-hire metric, giving granular insight into hiring cost per employee. In contrast, RCR is an organisational metric showing how recruitment expenses compare to total payroll or revenue. CPH measures efficiency per-hire basis, while the broader financial impact of recruitment efforts on the organisation as a whole is measured in RCR.

For example, if a company invests ₹500,000 towards recruiting workers in a year and its total payroll is ₹5,000,000, then its RCR would stand at 10%. In contrast, CPH will consider the expenditure incurred when recruiting a specific employee and blot out all other situations related to the company’s financial position.

How Can RCR be a Better Fit for Certain Recruitment Scenarios?

RCR is most useful to organisations that must evaluate the aggregate cost of recruiting over time. It is especially useful when working with a huge or continuing recruitment requirement. A better fit for applications where a company hires many employees in different roles and wants to understand its share of resources spent on recruiting compared to total compensation expenditure.

RCR is also helpful for growth or refocusing businesses, as it will enable tracking of how recruiting spending scales with increasing payroll or revenue. It can give a richer view of the recruitment efficiency of the company’s workforce-at-large. It is particularly valuable to those organisations more interested in long-term recruitment strategy and cost control rather than individual hiring efforts.

What does “total number of hires” mean?

The total number of hires indicates the number of successful recruitment events over a stipulated period. As a result, an individual becomes a new employee for the organisation. It will be part of the computation in developing the Cost Per Hire (CPH)  metric because this total figure is divided by the recruitment costs incurred to ascertain an actual cost per hire.

In this manner, the overall number of hires will gauge the effectiveness of hiring campaigns and ensure that HR departments can correctly measure their recruitment strategies’ cost-effectiveness.

What Does “Hired” Mean In The Context of Cost Per Hire?

For cost-per-hire purposes, typically the following are considered to be a “hire”:

• Successful Full-Time Employment: In the most literal sense, a hire is an accepted offer of employment, someone who says yes to the job and starts full-time with the organisation. This is the most frequent measure of permanent hires and long-term positions.
• Temporary or Contractual Employees: Other individuals who can also be included in hiring numbers for CPH are temporary, contract, or part-time workers, where the hiring process of a firm determines this. These are important in business because contract work prevails in tech or seasonal retail.
• Interns or Apprentices: Interns or apprentices are considered hiring. Those working under company official onboarding and serving under structured contracts are assumed to be hiring. However, some organisations would not regard them as part of the CPH because of their aversion to using the same recruitment sources as employees.
• Internal Transfers:  Internal transfers involving existing employees being transferred or promoted into new positions may or may not be reported as new hires. Company policy will depend on this. More often than not, though, internal relocations are not included  in CPH calculations because they don’t incur external hiring expenses.
• Employees Rehired: For example, an employee who previously worked in the organisation, left and returned to the organisation as a new employee would be regarded as a “hire” in the computation of CPH. In some organisations, however, organisations may involve fewer recruitment resources and lower costs that external sources would incur.
• New Hires through Acquisitions or Mergers: For instance, in the process of merging or acquisition, assuming new employees are brought into the organisation through acquisition, they may also be considered hires. It is, however, largely dependent on the method applied in computing the measure of CPH by the specific acquisition processes for the company.

What is the Best Way to Keep Track of the Total Number of Hires?

The number of hires may be correctly determined only if an organisation practises a systematic approach to monitoring and documenting the whole recruitment event. Some ways an organisation can track the total number of hires include the following:

• Centralised tracking system through HRIS/ATS: Using an Applicant Tracking System (ATS) or Human Resource Information System (HRIS) is one of the most reliable ways to track hires. These systems automatically log all recruitment activities, including job applications, interviews, and hires. They maintain records of candidates from the first point of contact through to the final hire, providing an accurate count of successful hires. Many HRIS platforms also integrate with job boards and external systems to streamline the tracking process.
• Standardised Concept of a “Hire”: The HR team needs to define uniformly what a hire is. For instance, decisions regarding the point at which the hire is counted (be it when the employee starts work, signs a contract, or merely accepts the offer) can drive the total count of hires. Regular communication as well as training by the HR department can ensure that all members are aligned on what qualification constitutes a “hire.”
• Manual Record Keeping: If an organisation does not have an automated tracking method, then spreadsheets would be the alternative method of manually tracking the candidates. Such records should track every candidate from application to hiring and should contain details about job roles, offer acceptance, dates started, and recruitment costs. It is, in fact, more labour-intensive, though still reliable if the data is kept up-to-date and reviewed regularly for accuracy.
• Monitoring Acceptances of Offers: Another is tracking offer acceptance. It means that a candidate has accepted an offer to join the company. This doesn’t reflect the start date of an employee; often, offer acceptance can be used as a clear point to track hires. Companies can hang up workflows that capture the moment when applicants formally accept offers and start being onboarded.
• Segmentation by Recruitment Channel: Break up of hires by recruitment channel – how many are sourced through employee referrals, job boards, agencies, etc. This gives them a sense of which channels are major contributors to the hiring process and helps the HR team optimise recruitment budgets and strategies.
• Reporting and Data Analysis: Recruitment reports preferably scheduled at monthly, quarterly, and yearly intervals which summarise the total number of hires and which track the computation of CPH. These must include KPIs such as time to hire and cost per hire, among others. Organisations can use data analytics tools to stay abreast of recruitment activities and ensure that all hires are captured properly as well.
• Reconciliation of Recruitment Data with Financial Systems: This means that recruitment cost and the number of hires have to be placed in the financial systems of the company to attain the real calculation. As such, the total hires can be traced to calculate the cost per hire. This calls for an accurate and consistent method of documenting each recruitment event. It is up to the HR teams to delineate what counts as a hire, set up reliable mechanisms, and then conduct periodical reviews of those data to check their accuracy. This will help an organisation get a better view of its hiring processes’ effectiveness and optimise its recruiting processes to reduce expenses while improving the quality of its hiring results.

How Does Cost Per Hire Affect HR Policies?

Cost Per Hire counts in human resource strategies as it indicates whether recruitment strategies are efficient or not. Here is how it affects human resource strategies.

Budget Allocation

This allows HR to measure the cost of bringing in new talent, thus enabling informed decisions that are perfectly aligned with the budgeted recruitment spending. An advanced level of Cost per Hire can enable HR to check the expenditure in some specific recruitment channels and transfer sources to more effective sources.

Efficiency and Process Optimization

Cost per Hire enables an HR team to identify inefficiencies in the recruitment process. For example, if a high CPH is such that the interview processes are taking quite a lot of time or any agency is dependent, HR could streamline those stages, opt for automation tools, or focus more on employee referrals to reduce costs.

Recruitment Channel Selection

Cost per Hire reveals useful information on the most cost-effective recruitment channels. If a channel, say job boards or social media, is associated with low hiring costs without loss of quality. HR can focus more on them by optimising the recruitment strategy for better investment returns.

Decrease Time to Hire

A very high Cost per Hire would indicate that the hiring process is dragging on too long, which raises the cost. Reducing some of the expenses, such as automating some of the work in the recruitment process or reducing interview rounds, can lead to fewer days-to-hire and fewer dollars spent per Hire, thus keeping the entire process more economical in general.

Balancing Cost and Quality of Hire

Although cost-effectiveness is of utmost importance, the quality of talent hired also needs to be combined by HR teams. Monitoring CPH together with other metrics, such as  QoH (Quality of Hire) ensures that efforts of HR departments at cost-saving do not negatively impact quality of new employees.

Benchmarking and Performance Comparison

Cost per Hire allows the organisation to benchmark hiring costs against industry averages or competitors. Thus, it is easier for HR teams to adjust their strategies so that they are always in competition and at their best effort, especially when entering new markets or when hiring volume increases drastically.

Conclusion

Proper understanding and optimization of CPH is more than just a play in finance; it is a strategic move that strengthens one’s recruitment processes. Having measured CPH, organisations can make better decisions about balancing efficiency with quality so that top talent is attracted while still staying within budget.

A well-crafted idea of CPH will allow HR professionals to make data-driven decisions, forecast recruitment expenses, and identify areas for improvement. In the big picture, investing in refining your recruitment strategy pays dividends in building a productive, engaged workforce, and helps your organisation grow sustainably in a competitive market.

Keep tracking, analysing, and adjusting, because every hire is an investment in your organisation’s future.

If you are looking to drastically reduce your overall cost-per-hire while increasing the effectiveness of your hiring process, just look at TankhaPay’s state-of-the-art Applicant Tracking System (ATS). Our ATS system is engineered to help facilitate your hiring process, to streamline and eliminate administrative burdens and ultimately to help you land the best talent at a lower cost.

FAQs about Cost per Hire