Hiring a new employee is a big investment for any company. The total cost is not limited to the salary and benefits listed in the job description. There are many hidden costs that can add up over time.
As a HR leader or hiring manager, you may want to understand what affects the cost of hire as this can help you work out the budget you need to achieve your hiring goals for the next month, quarter, or year. So how can you calculate the true cost of hiring?
Let’s dig into the different costs involved, and how to calculate the cost of hire.
What Is Cost of Hire?
The cost of hire (CPH) is the total cost of recruiting, hiring, and onboarding a new employee. It includes both direct and indirect costs. The average cost of hire depends on many factors, including:
- Size and location of the company
- Role and seniority level
The average cost of hire in the United States ranges from nearly $4,700 for a typical role to $28,000 for an executive hire, according to a study by the Society for Human Resource Management (SHRM).
Understanding your company’s specific cost of hire will help you make informed, data-driven decisions about your recruitment and hiring process. Let's break down some of the significant factors that can impact your cost of hire:
These are the straightforward, easily measurable costs associated with talent acquisition. Direct costs of hiring can be significant, so it is important to factor them into your overall cost of hire.
This is the most obvious cost of hire. The salary of the new employee varies depending on their role and experience.
Typical recruiting costs include advertising, sourcing candidates, and conducting interviews. Recruiting costs can vary depending on the methods used to recruit candidates.
Providing the new employee with equipment, and access to resources to understand their job and company policies.
This includes the cost of onboarding new employees to help them ramp up into their role. It could include providing the new employee with training on the company's policies, procedures, and products or services.
Indirect costs are expenses you might not immediately correlate with cost of hire, but they can have a significant impact on your company’s budget. These can include:
Managers and other employees spend time interviewing candidates, reviewing resumes, and assessing interview tasks. While these tasks are important, they take people away from their normal work responsibilities, which can reduce their productivity — especially if you’re hiring for many roles at once.
If a new hire leaves the company early, the company may have to pay severance pay or incur the costs of recruiting and hiring a new employee.
Mistakes made by a new hire reflect poorly on the company, it can damage the company's reputation. This can make it more difficult to attract and keep top talent in the future.
How to Calculate Cost per Hire
Now that you understand some of the factors that can affect the cost of hire, let's jump into the practical bit: how to calculate it.
There are a number of ways to calculate COH. The most common method is to use the following formula:
- Add up your direct and indirect costs on all new hires in a given period.
- Divide that number by the total number of hires in that same period.
Written out as a formula, this looks like:
Cost per Hire = (Direct Costs + Indirect Costs) / Number of Hires
For example, if your direct costs are $5,000 and your indirect costs are $3,000, and you hire 10 people in a year, then your COH would be $800 per hire.
Why Is Cost of Hire Important?
Understanding your cost of hire helps you to keep a handle on the recruitment process. Knowing these costs — and what affects them — can help you in many ways, including:
- Budgeting: Knowing your average cost per hire helps you to allocate your budget effectively. When you're aware of the resources it takes to bring on a new team member, you can plan strategically for future recruitment.
- Process improvement: By breaking down the cost of hire, you can identify any costly bottlenecks in your recruitment process and find ways to streamline it.
- Benchmarking: Comparing your cost per hire to industry standards can reveal if you're spending too much (or too little) to attract talent.
- Performance evaluation: Are your HR initiatives delivering the expected results? Understanding your cost per hire can help you answer this question.
The High Cost of a Bad Hire
A bad hire can be a pricey stumbling block. On average, it can cost up to 30% of the employee’s first-year salary. Not only do you face tangible costs like recruitment and onboarding, but also these less visible costs.
Wasted Training and Onboarding Costs
You've invested time and money into integrating a new hire, only to realize they're not the right fit.
If a position remains unfilled or is filled inadequately, projects may get delayed, affecting overall productivity.
A poor hire can affect team dynamics, decreasing overall morale and potentially increasing turnover.
If a new hire doesn't work out, you're back to square one. This means shouldering the cost of the hiring process all over again.
A bad hire can cause your cost of hire to skyrocket, as you incur further hiring costs to replace them plus the cost of their salary, severance package, benefits package, and any costs to mitigate disruption to the team. The total costs of a single bad hire detailed in an Undercover Recruiter analoysis is an eye-popping $840,000 bottom-line drain. And this wasn’t a major leader — this was a $62,000 per year second-level manager who left after just two and a half years with the company.
Calculating the cost of a bad hire can be a tricky business, given the wide range of potential impacts, but industry experts agree that it often exceeds the cost of a successful hire.
Employee Wellbeing Supports Hiring and Retention
Getting a grasp of your hiring costs can help you take control of the recruitment process and maximize your HR budget. Once you know the costs involved — both for successful and bad-fit hires — you can look for ways to reduce expenditures to improve your return on investment.
One lever you can pull to reduce your hiring costs is to invest in employee wellbeing. According to our research, 91% of CHROs say wellness programs are important for talent acquisition, and 85% of HR leaders say these programs can decrease talent management costs, including the cost of talent recruitment, retention, and engagement.
Gympass all-inclusive subscription offers employees access to thousands of wellbeing partners, from in-person classes to app subscriptions.
- Miller, Steven. (April 11, 2022). SHRM HR Benchmarking Reports Launch as a Free Member-Exclusive Benefit. SHRM. Retrieved July 18, 2023 from https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/shrm-hr-benchmarking-reports-launch-as-a-member-exclusive-benefit.aspx
- (January 11, 2023) The Cost Of A Bad Hire And Red Flags To Avoid. Apollo Technical. Retrieved July 18, 2023 from https://www.apollotechnical.com/cost-of-a-bad-hire/
- Sundberg, Jörgen. What Is the True Cost of Hiring a Bad Employee? Undercover Recruiter. Retrieved July 18, 2023 from https://theundercoverrecruiter.com/infographic-what-cost-hiring-wrong-employee/
- Samra, Sim. (January 31, 2022). Everything you need to know about cost per hire. Recruitee. Retrieved July 18, 2023 from https://recruitee.com/articles/cost-per-hire
The Gympass Editorial Team empowers HR leaders to support worker wellbeing. Our original research, trend analyses, and helpful how-tos provide the tools they need to improve workforce wellness in today's fast-shifting professional landscape.