The What and How of Calculating Recruitment Costs
According to the National Association of Colleges and Employers (NACE) 2013 Recruiting Benchmark Survey Report, the average cost-per-hire for college recruiting during the 2012-13 recruiting season was $3,639. The report found that the average number of days from interview to offer was 24.7, and the average number of days from offer to acceptance was 13.5.
This means that a company shelled out nearly $3,700 over the course of 38.2 days—longer than one month.
And think about if a business hired more than one college graduate during this timeframe—let’s say five. That company could possibly spend $18,000+ in recruitment costs. And this amount could just reflect a small percentage of the entire recruitment costs for one particular department or team.
If you consider that most businesses are comprised of multiple teams and departments—each that creates its own recruitment costs—it’s easy to see how the overall recruitment costs for a business can quickly add up.
And with the cost of a bad hire costing companies two and one-half times the person’s salary, it’s also very evident why containing recruitment costs is so important during the hiring process.
And to effectively do so, employers and recruiters must start with the first and most important step: calculating recruitment costs.
How can your business go about containing costs if you aren’t aware of the whats and hows:
• What are recruitment costs?
• How are they calculated?
Luckily, like most recruitment-related topics, there are a slew of references and experts willing to share their expertise and help you answer these questions.
What are recruitment costs?
The Society for Human Resource Management offers a thorough document detailing the Cost-per-Hire Standard, an American National Standard for human resource management. The report explains:
This Standard is designed as a tool to allow an organization to determine accurate and comparable costs to staff a position using standard data and formulas to calculate the recruiting costs to be incorporated into cost-per-hire.
The recognized standard defines three types of cost-per-hires (defined verbatim):
1. Cost-per-Hire, Internal (CPHI):
Defines a formula and methodology for creating the CPH measure appropriate for a particular organization. This metric is not designed for comparison with other organizations’ CPH data. It is designed to be a comprehensive reflection of cost and hire data for a single organization.
2. Cost-per-Hire, Comparable (CPHC):
Defines a formula and methodology for creating the CPH measure appropriate for comparison across organizations. This metric uses a similar methodology to CPHI; however, it uses a subset of data that is more likely to be used across organizations and is helpful in building acceptably strong comparisons of costs between organizations.
3. Recruiting Cost Ratio (RCR):
Defines a formula and methodology comparing the total cost of hiring against the total compensation of the newly hired individuals in the first year of their employment. This formula varies from the CPHI or CPHC only in the denominator; whereas CPHI or CPHC are ratios of costs to the number of hires, the RCR is a ratio of costs to total first-year annual compensation of the new hires.
New Zealand recruitment company, OCG Consulting, also suggests companies calculate the cost of a vacancy, or COV. The company says this is a critical calculation because it will “determine the actual business impact of talent shortages that result from a gap between the time talent is needed and the time required by the recruiting function to supply such talent.”
OCG says calculating COV is also important because businesses are “unlikely to place the requisite emphasis on addressing recruitment issues if they are unaware of the negative impact such vacancies may be generating.”
The company has an easy-to-use COV calculator on its website. It explains the COV calculation process:
Based on the average revenue per employee this calculator takes the company’s revenue per employee (which is the company’s total revenue divided by the number of employees) and divides that by the number of working days in a year. Then based on the number of days the role is vacant and the time it takes for a new hire to get up to speed you can estimate the cost to your company of the vacancy.
OCG says that the principal behind this calculation is that if an employee is not in place, a business cannot generate the revenue that the vacant employee would have generated, on average.
How are recruitment costs calculated?
Industry experts offer a range of cost-calculating tips, from using specially designed calculation tools to DIY formulas.
In her article, “How to Calculate Your Recruiting Costs,” Allison Reilly, writing for the Recruitment Process Outsourcing Association, says, “Knowing how to make the calculations can make a huge difference in the resources that go to recruiting and how recruiting impacts the bottom line.”
Reilly focuses on measuring the efficiency of one’s recruiting by using cost per hire and/or recruiting cost ratio.
“Either metric offers a different picture of your recruiting costs and efficiencies,” she writes.
Reilly breaks down both formulas:
Cost per hire: Divide recruiting expense by the number of hires.
RCR: Divide recruiting expense by the compensation of the hires.
Fill-in-the blank worksheets
The Human Resource Management Center offers a (what may be considered) simpler approach.
Most recruiting cost calculators only take into account the costs of sourcing applicants, but the other half of the process – selection and hiring – is usually not taken into account in sufficient detail to show the considerable expense involved in processing applicants through your selection process.
Its website offers two detailed worksheets to calculate recruitment costs, one for a streamlined interview process and one for multiple interviews. The worksheets are complete with a range of fill-in-the blanks, including:
• Total Annual Resumes & Applications
• Annual Hires
• Average Time to Fill
• Typical Annual Administrative Support Salary + Benefit
• Typical Annual HR/Recruiter Salary + Benefits
• Typical Annual Professional Level Salary + Benefits
• Typical Hiring Manager Salary + Benefits
Both worksheets also include a list of the typical activities to fill each opening, the number of hours they take and who performs each task. Users simply fill in the blanks and hit the “calculate” button when finished to generate an estimate.
OCG Consulting also offers a DIY calculator to determine how much it will cost your business to recruit a new or replacement hire versus outsourcing this task.
“..using the hiring manager’s salary this calculates the actual cost of his/her time plus any associated costs such as advertising for a New Hire and a Replacement Hire.”
Includes fill in, such as:
• Salary benchmarking
• Advertising preparation & placement
• Resume screening
• Candidate screening
• Respond To unsuccessful applicants
• Interview preparation and setup
• Written offer
OCG advises users of the free tool to add the DIY costs to the cost of a vacancy for a holistic view of the actual cost impact a vacancy can have on your company.