Cost Per Hire: Definition, Calculation & How to Reduce

Finding top talent can be expensive. 

Companies spend thousands of dollars per hire. And when you consider the fact that a limited recruiting budget is a leading  challenge for HR professionals, it’s clear why reducing cost per hire is on so many recruiters’ minds.

In this Willo article, we explain the key details behind cost per hire and how to reduce it by optimizing your hiring process.

What Is Cost Per Hire?

Cost per hire is a metric that tells you how much you need to spend to recruit a new employee (on average). 

It includes a wide range of expenses, including:

• Job board subscriptions and posting fees
• Recruitment software and ATS fees
• Employee referral program bonuses
• External recruiter or agency fees
• Background check and screening costs
• Recruiter time (calculated as a portion of their salary)

Tracking cost per hire helps you understand the financial impact your recruitment efforts have on your organization. It can also help you improve the efficiency of your recruiting process, budget for recruiting initiatives, and compare the cost of different recruiting methods.

How to calculate cost per hire

Calculating cost per hire involves summing up all the expenses associated with the hiring process and then dividing that total by the number of hires made within a specific period. 

The formula is: 

• Total Recruiting Costs / Number of Hires = Cost Per Hire

Here’s a step-by-step guide to help you compute this metric:

1. Identify all cost categories: Create a spreadsheet or document to track the different expenses incurred during the recruitment process.
2. Fill in data for each new hire: Whenever you have an open position, add in the relevant data for that particular hiring process.
3. Sum the expenses: Add up the totals in each category, and then add the category totals to get the total cost.
4. Divide by the number of hires: Add up the number of hires included in your data set, and divide the total cost by that number to get your cost per hire.

Here’s a basic example to illustrate:

Why Is Cost Per Hire an Important Metric to Track?

There are tons of reasons we could cover here, but let’s stick with the highlights:

• Financial transparency: Understanding your cost per hire provides a clear picture of recruitment expenses. This financial transparency allows for better budgeting and resource allocation, ensuring you spend wisely on your hiring process.
• Identifying inefficiencies: By tracking this metric, you can pinpoint areas where your recruitment process may be inefficient. If certain methods or channels are consistently costly without yielding quality candidates, you can re-evaluate and refine your strategy.
• Benchmarking performance: Comparing your cost per hire over time or against industry standards helps you gauge the effectiveness of your recruitment efforts. This benchmarking allows you to identify trends, set realistic goals, and continuously improve your hiring process.
• Supporting business growth: Lowering your cost per hire can free up funds for other critical business activities, supporting long-term growth and stability.

5 Tips to Reduce Cost Per Hire

1. Prioritize internal recruiting

Internal recruiting means looking to your current roster when a position opens up. Studies show it’s typically 1.7X less expensive to hire from within than it is to hire externally. 

To put that in perspective, with an average cost per hire of $5K, you’d save an estimated $2K for every internally filled position.

The key to success here is accurate data. You need to understand:

• Who you have available
• What skills they have
• What proficiency individuals have in needed skills
• Who would take their place in their current role

Filling all these gaps is relatively easy, it just requires an organized approach to HR and regular check-ins with your employees. Periodic skill and skill gap assessments are also incredibly useful for internal recruiting. 

2. Develop a strong talent pipeline

When a higher percentage of the candidates your talent pipeline supplies are good, cost per hire (generally) decreases, since you need to spend less time and resources filtering.

So, how do you develop a strong talent pipeline? Here are some strategies:

• Leverage your data: Use past hiring data to identify the channels that have historically led to the most successful hires. Then, focus your sourcing resources on these channels.
• Create talent communities: Instead of a one-size-fits-all pipeline, segment your candidates into specialized communities based on skills, experience levels, and career aspirations. Then, personalize your communication and outreach for better results.
• Implement skills-based hiring: Move beyond traditional resume screening by developing skills assessments that accurately predict job performance. Once you have this data on hand, it’s easier to accurately slot candidates into roles they’re well-suited for.

3. Implement a pre-screening process

Unqualified candidates are a big drain on recruiting resources—and this issue is compounded the longer they go unnoticed in your pipeline. Pre-screening helps you catch unqualified candidates as early on in the process as possible by screening for baseline, must-have requirements.

This might include:

• Legality: Are they legally allowed to work for you? (e.g. UK tier 2 visa)
• Language skills: Do they speak the language(s) required in your organization?
• Technical skills: Do they have all the specific technical skills required? (e.g. Java)
• Availability: Are they available to work when required?
• Basic qualifications: Do they have all the required certifications or licenses? (e.g. CPA certification)

We have a whole article on pre-screening interviews and how to implement them if you’re interested in a deep dive.

4. Switch to async video interviews

Async video interviews are a kind of virtual interview where candidates record responses to preset questions and then submit them for review. And due to the async, fully remote nature of these interviews, they can significantly reduce your cost per hire.

Here’s how:

• Reduced scheduling time: Interview scheduling takes up a huge percentage of recruiter time, and async video interviews help you reclaim all of it. You can check out our time saving calculator for an estimate.
• Increased recruiter capacity: Async video interviews let recruiters screen more candidates in less time, effectively boosting their productivity. Smaller teams can handle larger candidate backlogs when they can focus fully on reviewing responses.

For a real-world example of this impact, Lunio was able to save over $50,000 using Willo’s async interview tools to screen and hire seven SDRs. In the process, they also saved 42 hours compared to traditional phone screens.

Source: How Lunio’s HR team saved over $50,000 using Willo to hire SDRs

To get started, all you need to do is:

1. Find an async interview tool. Willo offers video interviews and supports your team with interview features like interview scorecards, question generation, commenting, ID verification, and more.
2. Create your interview. Write (or generate questions), set a number of redos, set a time limit, and create an expiration date for your interview.
3. Share with candidates. To share your interview with candidates at scale, you can add the secure sharing link to emails or application forms.
4. Review responses. Once candidates complete the async interview, their responses will be available for review. You can easily score candidates using the built-in scorecard feature.

5. Implement employee referral programs

Employee referral programs are a cost-effective way to find quality candidates. 

By offering incentives such as bonuses, extra vacation days, or gift cards, you can encourage your employees to refer candidates, tapping into a valuable network of potential hires. Referred candidates often fit well with the company culture and have higher retention rates, reducing turnover costs.

For example, offering a $500 bonus to employees for successful referrals can save on external recruiting costs while leveraging the existing workforce to find candidates who are likely to succeed in the company environment.

Reduce Cost Per Hire With Willo

Cost per hire is an important recruiting metric that helps give you a high level overview of your hiring costs. It may not yield all the information you need, but it‘s an important starting point for recruiters that are starting to investigate inefficiencies and possible areas for improvement.

Our top recommendation for reducing cost per hire? Cut out resource intensive live interviewing and replace it with Willo’s async video interviews. This will let you gather the information you need at significantly reduced cost—all while improving candidate experience.

Start your free trial today and experience a better way to interview.

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