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Hiring an Employee How Much Does It Cost

December 15, 2000
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Related Topics: Candidate Sourcing, Featured Article
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You are absolutely correct if you say that the quality of the hire is moreimportant than the cost.

However, when you’re doing a cost-benefit analysis to determine whether tobuy an applicant-tracking product, one of the first steps is to figure out whatyou’re spending now.

When large companies hire thousands of employees per year, these costs cantake a significant portion of the HR budget and the total operating expenses.Successful start-ups and dot-coms are also feeling the squeeze. Agency fees of20-30% of the new hire’s base salary have a heavy financial impact when you’readding over 100 new hires per year.

Whether you are using the new electronic methods or the traditional hiringtactics, having a standard and effective way of measuring your cost per hire isessential to evaluating your recruiting effectiveness and efficiency. TheSaratoga Institute includes six basic elements to calculate Cost per Hire:

    1. Advertising
    2. Agency and search firm fees
    3. Referral bonuses paid to employees
    4. Travel costs incurred by both recruiters and applicants
    5. Relocation costs
    6. Company recruiter costs (including salary and benefits prorated if therecruiter performs duties other than staffing)

These six factors account for 90% of the costs to hire. Saratoga Instituteadds an additional 10% to cover miscellaneous expense items such as testing,reference checking, bonding, hiring unit staff time, administrative support andother minor expenses.

The internal cost per hire calculation is very similar. It includes four dataelements: Any internal advertising costs, travel and interview costs, relocationcosts, and internal recruiter costs. The combination of both external andinternal hiring costs provides a total cost analysis of your recruiting efforts.

Total cost per hire

In the Saratoga Institute Human Capital Report for 2000 (compiled fromcalendar 1999 data), the total cost per hire (external and internal hires) forall 991 participants surveyed averaged $4,588. The exempt cost per hireaveraged $12,032 and nonexempt $989.

External vs. internal for exempt employees

Exempt external cost per hire averaged $8,676 while exempt internalcost per hire hit an average of $15,008. Exempt internal costs are greatlyinfluenced by relocation expenses while the exempt external costs are highlyswayed by both relocation costs and agency fees.

Regional differences

A closer look at the total costs to hire exempt employees shows that highercosts are seen in companies located in the West and for organizations in theComputer, Pharmaceuticals/Medical Devices, and Manufacturing industries. Highnonexempt costs are also seen in companies located in the West. The regionalvariances can be attributed to several factors: The higher costs of doingbusiness, higher cost of living and therefore higher salary demands, plus thedemands of a tight labor market -- there are simply more jobs than people.

Costs by source

The total costs to hire are only one element in an effective and efficientrecruiting function. Many companies don’t measure and therefore don’tunderstand what works for their organization since they’re not looking attheir costs and hires by source. A breakdown of the 1999 total hiring costs showsthat on average 18.4% of the total hiring cost was allocated to advertising and19.9% was paid to agencies and search firms; only 1.8% was for referralbonuses, 2.7% for travel costs, 32.9% was paid out for relocation expenses, and24.3% was for recruiter pay and benefits.

The breakdown for external exempt hires shows that close to 50% of the costis allocated to agencies' fees and relocation expenses.

When evaluating cost per hire, and considering any changes, the key is tolook further. Ask yourself these questions:

  • Are you getting what you pay for right now?
  • What is the retention rate for those employees hired from employeereferrals vs. agencies?
  • What is the average tenure for employees who relocate?
  • What level employees are best hired from newspaper advertising?
  • What source has provided you with the highest performers?

The cost to hire exempt external employees has risen 25% in the last twoyears. Effective staffing functions use this data to plan successful recruitingstrategies that supply them with the quality hires they seek and hopefully slowdown that rate of cost increase.


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