Cost per Hire Explained: From Definition to Optimisation

On a global scale, 2025 analysis reports that the average cost to hire an employee is approximately $3,500 (although this figure varies widely based on region and job type). It highlights the wide variation in recruitment expenses across different organisations and industries.

 For many companies, the total cost to hire a new employee can reach 3 to 4 times the position's salary. Additionally, about 20﹪ of companies spend more than 60﹪ of their HR budgets on talent acquisition.

 Understanding these hiring costs is crucial for effective recruitment budget planning. This comprehensive guide will help you understand everything about cost per hire as a hiring cost metric.

 From defining what it is and breaking down the CPH formula to analysing factors that influence your recruitment costs and providing practical strategies to optimise them, you’ll get to know all the essentials you need to manage this critical aspect of your HR operations.

Key Takeaways

 Understanding and optimising cost per hire is essential for effective recruitment budget management and strategic workforce planning.

• Calculate Cost Per Hire accurately: Use the formula (Internal costs + External costs) ÷ Total hires to track actual recruitment expenses and identify optimisation opportunities.

• Role complexity drives costs: Executive positions cost up to $28,000 per hire, whereas entry-level roles cost $1,588 to $2,382, necessitating different budget strategies.

• Employee referrals deliver exceptional ROI: Referred candidates are hired 55﹪faster and save approximately $3,000 per hire while showing better retention rates.

• Automation reduces costs by 30﹪: Implementing ATS tools and recruitment automation can cut hiring expenses significantly while improving process efficiency.

• Strong onboarding prevents costly turnover: Organisations with effective onboarding improve retention by 82﹪, reducing expensive re-recruitment cycles.

The key is balancing cost-efficiency with quality hiring. Tracking CPH consistently enables data-driven decisions that optimise your recruitment investment while attracting top talent.

What is Cost per Hire and Why It Matters

Cost per hire (CPH) stands as one of the most fundamental recruitment metrics that businesses track. Understanding this concept is essential for effective talent acquisition management.

Definition of cost per hire (CPH)

Cost per hire represents the average amount spent on recruiting and bringing each new employee into an organisation. The metric includes all expenses accumulated throughout the recruitment process, from initial sourcing to the employee's first day. The Society of Human Resource Management (SHRM) and the American National Standards Institute (ANSI) established a standard formula for calculating CPH:

CPH = (Internal recruiting costs + External recruiting costs) / Total number of hires

Internal costs encompass expenses related to in-house recruitment efforts, including recruiter salaries, hiring manager time, and talent acquisition team training. External costs include expenses incurred outside your organisation, such as job board fees, agency costs, pre-employment assessments, and employer branding activities.

Why is CPH a Key Hiring Cost Metric?

Tracking cost per hire offers numerous strategic advantages beyond simple expense monitoring. Primarily, it helps companies evaluate the efficiency of their recruitment processes and optimise spending. This visibility enables HR teams to allocate resources more effectively, ensuring investments go toward the most productive hiring channels.

Moreover, CPH serves as a performance benchmark that allows companies to measure their recruitment effectiveness against industry standards. The SHRM places the average CPH at approximately £3,514, though this varies significantly based on industry, company size, and position level.

CPH also reveals the financial impact of recruitment strategies. For instance, Ericsson reduced their cost per hire by 70﹪ through social media and employee advocacy initiatives, simultaneously improving retention rates. This illustrates how CPH connects directly to overall business performance.

How Cost Per Hire Supports Recruitment Budget Planning?

Understanding your cost per hire is crucial for creating accurate recruitment budgets. Specifically, CPH data enables HR professionals to forecast future hiring expenses with greater precision.

To build a recruitment budget, first calculate your current Cost Per Hire by analysing past recruitment expenses. Then, work with department heads and hiring managers to project upcoming hiring needs based on skills gaps, growth plans, and anticipated turnover. Multiply your projected hires by your current CPH to establish a baseline budget for the coming period.

Furthermore, this approach helps organisations understand the actual financial impact of their recruitment efforts. By itemising each expense component, companies can identify opportunities to reallocate resources for maximum effectiveness.

Consequently, CPH data enables more strategic workforce planning, allowing companies to make informed decisions about when and how to grow their teams without unexpected budget overruns.

Breaking Down the Cost per Hire Formula

The CPH formula might seem straightforward on the surface, but understanding its components requires careful analysis of both internal and external recruitment expenses. Let's break down each element to grasp how recruitment costs truly accumulate.

What are the Internal Recruitment Costs?

Internal recruitment costs encompass all expenses incurred within your organisation during the hiring process. These primarily include recruitment team compensation packages (salaries, bonuses, benefits), hiring manager time costs, overhead and administrative fees, training and development costs for your recruiting team, and employee referral bonuses. 

Even resources allocated from one team to another for recruitment purposes count as internal costs, despite the money staying within the company.

What are the External Recruitment Costs?

External costs cover all expenses paid to outside vendors or services during recruitment. These typically include job board posting fees, external agency fees (often 20-25﹪ of annual salary), pre-employment assessments, background checks, drug testing, job fair participation expenses, applicant tracking system subscriptions, and relocation costs. 

Additionally, signing bonuses and candidate travel expenses represent significant external recruitment investments.

How to calculate cost per hire step-by-step?

First, define your measurement period as monthly, quarterly, or annually. Next, gather all internal recruitment costs for that period and add them up. Afterwards, identify and sum up your external recruitment costs. Then, determine how many people you hired within that timeframe, excluding internal transfers. Finally, apply the formula: 

Cost per hire = (Internal costs + External costs) ÷ Total number of hires.

For example, if internal costs total $50,000, external costs $30,000, and you hired 20 employees: CPH = ($50,000 + $30,000) ÷ 20 = $4,000 per hire.

Common mistakes in recruitment cost calculation

Many organisations underestimate hidden costs, such as productivity losses from extended vacancy periods. Another error involves excluding hiring managers' time costs during interviews. Beyond this, failing to account for onboarding expenses or administrative processing time leads to inaccurate calculations. Importantly, calculations should exclude costs after employees are hired, such as training expenses.

Factors That Influence Your Cost per Hire

Several key variables dramatically affect your cost per hire figures, often creating significant disparities between organisations within the same market.

Role complexity and seniority

Position level stands as perhaps the most influential factor in recruitment expenses. According to industry data, executive roles can cost approximately $30,467 per hire, whereas entry-level positions typically require just $2,150 to $3,226. This striking difference reflects the extensive search processes, specialised assessments, and comprehensive evaluations needed for senior appointments. Notably, making a poor hire at mid-manager level ($56,886 salary) can ultimately cost a business over $1,78,796.

Executive hires cost significantly more than non-executive hires. The chart highlights a clear gap in hiring expenses, with executive recruitment demanding a much higher investment overall. [Source: LinkedIn]

Industry-specific hiring costs

Various sectors experience markedly different recruitment expenses based on talent availability and regulatory requirements. In 2023, tech companies invested between $6,457.77 and $8,606.33 per hire, with healthcare positions commanding even higher figures of $9,680 and $12,917. 

Particularly, highly regulated industries face elevated costs due to extensive background checks, licensing verification, and compliance requirements. Professional services sectors typically see costs around $6,668 per hire, versus just $1,150 for accommodation and food service roles.

Company size and hiring volume

Organisation scale directly impacts recruitment efficiency. Larger companies generally achieve lower cost per hire through dedicated recruitment teams, established processes, and vendor discounts. Conversely, smaller businesses often lack predefined hiring budgets, which makes their recruitment proportionally more expensive. Companies with complex, multi-site operations can particularly benefit from standardising their talent acquisition models.

Geographic location and market conditions

Regional differences substantially influence hiring expenses through varying salary expectations and competition levels. Organisations in major metropolitan areas typically face higher recruitment costs due to intense talent competition. Additionally, North America and Europe generally experience higher recruitment fees compared to emerging markets. In the UK, recent national insurance contribution increases have significantly impacted hiring costs for 84﹪ of companies.

How to Optimise and Reduce Your Cost per Hire

Reducing your cost per hire doesn't require cutting corners on quality. With strategic optimisation, you can significantly lower recruitment expenses while still attracting top talent.

Streamline your hiring process

First and foremost, develop a structured recruitment workflow with clearly defined requirements. Companies with well-defined processes experience faster time-to-fill and lower costs. Creating simplified job descriptions reduces unsuitable applications, hence saving screening time. For maximum efficiency, establish SMART hiring goals, such as Cedar Fair's 7-day time-to-offer target, during peak seasons.

Leverage employee referrals

Employee referrals consistently deliver exceptional value. When staff recommend candidates, they've pre-vetted them for skills and cultural fit. Referred candidates are hired 55﹪ faster than job board applicants and typically save organisations approximately $3,226 per hire. 

Interestingly, referred employees demonstrate stronger retention rates, further reducing replacement costs.

Use low-cost recruitment channels

Multi-posting to major job boards can cost as little as $337 for a whole month. In turn, a well-optimised careers page drives organic traffic through SEO with minimal investment. 

Similarly, employee-led social sharing outperforms traditional recruitment marketing, as potential candidates trust peer recommendations more than corporate messaging.

Invest in recruitment automation and ATS tools

Recruitment automation tools reduce hiring costs by up to 30﹪ by cutting time-to-hire by 40-60﹪. Advanced ATS platforms like iSmartRecruit deliver substantial ROI through streamlined workflows and reduced administrative burden.

Improve onboarding to reduce turnover

Organisations with strong onboarding processes improve new hire retention by 82﹪ and productivity by over 70﹪. Coupled with the fact that employees with a strong sense of belonging are 50﹪ less likely to leave within their first year, investing in onboarding ultimately reduces re-recruitment expenses.

Conclusion

Understanding and optimising your cost per hire represents a critical aspect of effective recruitment management. 

The Cost Per Hire formula provides a structured approach to calculating your recruitment expenses accurately. Therefore, mastering both internal costs (recruiter salaries, hiring manager time) and external expenses (job boards, agency fees) gives you complete visibility into where your recruitment budget actually goes.

Several factors undoubtedly influence your hiring costs. Role complexity is the most significant variable, with executive positions costing substantially more than entry-level roles. 

Additionally, industry-specific requirements, company size, and geographic location all play crucial roles in determining your final CPH figure.

Remember, cost per hire serves as more than just a financial metric; it reveals the efficiency of your entire recruitment operation. 

When you track cost per hire consistently, you gain the ability to make data-driven decisions about resource allocation, identify unnecessary expenses, and benchmark your performance against industry standards.

Ultimately, the goal isn't simply reducing this number but finding the optimal balance between cost-efficiency and hiring quality. After all, bringing the right people into your organisation determines your company's future success, regardless of what you spend to find them.

Frequently Asked Questions (FAQs)

1. What exactly is cost per hire, and why is it important? 

Cost per hire (CPH) is the average amount spent on recruiting and onboarding each new employee. It's a crucial metric that helps organisations evaluate their recruitment efficiency, allocate resources effectively, and plan budgets accurately.

2. How do you calculate the cost per hire? 

To calculate cost per hire, add all internal recruiting costs (e.g., recruiter salaries) and external costs (e.g., job board fees), then divide by the total number of hires in a specific period. The formula is: CPH = (Internal costs + External costs) ÷ Total number of hires.

3. What factors significantly influence the cost per hire?

Several factors impact cost per hire, including role complexity and seniority, industry-specific requirements, company size, hiring volume, geographic location, and market conditions. For instance, executive positions typically cost much more to fill than entry-level roles.

4. How can companies reduce their cost per hire without compromising quality?

Companies can optimise their cost per hire by streamlining the hiring process, leveraging employee referrals, using low-cost recruitment channels, investing in automation and applicant tracking systems (ATS), and improving onboarding to reduce turnover.

5. Why is tracking cost per hire important for businesses?

Tracking cost per hire helps businesses evaluate recruitment effectiveness, optimise spending, allocate resources efficiently, and make data-driven decisions about talent acquisition strategies. It also allows companies to benchmark their performance against industry standards and forecast future hiring expenses more accurately.