Calculating the cost to hire an employee improves budgeting and makes it easier to find more cost-effective solutions. In this article, we provide a breakdown of internal and external costs before and after hiring.
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- Understanding your hiring costs helps you see if you’re overspending or underspending, speeds up the hiring process and helps to find top talent more easily.
- The total cost to hire an employee includes expenses before and after you hire. This accounts for recruiters’ pay, the cost of hiring managers’ time, and job board fees, among others.
- Use the cost-per-hire formula to calculate the average hiring cost per employee before they join.
- Internal recruiting costs are spent on resources within the business, such as employee referral rewards. External recruiting costs are spent with other companies, like recruiting agencies.
- To optimize your overall hiring costs, prioritize employee retention, prevent burnout, incentivize internal referrals, and spread fixed costs across hires.
The cost to hire a new employee can be significant, so understanding what expenses are involved helps you avoid bill shock and hire skilled workers with more confidence. Small businesses in particular benefit from a clear hiring budget, as it helps them identify what they can and can’t afford to spend.
The average cost-per-hire is $4,683, according to a study conducted by the Society for Human Resource Management (SHRM). However, your business’s hiring costs will vary according to your industry, geographic location, the roles you’re hiring for, and other factors.
In this article, we’ll cover common costs before and after you hire an employee, provide examples of internal and external costs, and break down the cost of recruiting. We also share tips on how to get the most value out of your hiring costs.
Costs Before You Hire an Employee
Before you hire a new employee, a big chunk of your cost is on recruitment, including resources spent on unsuccessful candidates. Calculating your average cost per new hire will help you find areas where you might be over- or underspending. Likewise, it can help you understand how your investment pays off in the long run through workforce productivity and retention.
One of the most useful recruiting metrics is the cost-per-hire formula, outlined below. We’ve also provided internal and external recruiting cost examples that you can tailor to your business’s circumstances.
To calculate cost per hire, add up your internal and external recruiting costs. Then, divide that by the total number of hires.
Here’s what it looks like as a formula:
Cost per hire = (Internal recruiting costs + External recruiting costs) / Total number of hires
For example, say your internal recruiting costs are $50,000, your external recruiting costs are $70,000, and your total number of hires is 2,000. Your cost per hire is:
Cost per hire = ($50,000 + $70,000) / 2,000 = $6,000
That means it costs your company $6,000 to hire 1 new worker.
Internal recruiting costs
These include any costs spent on resources within your company. They account for:
The time your HR team spends on recruiting activities counts toward the cost to hire a new employee. This covers drafting a role description, sharing it on job boards, screening CVs, drawing up employment contracts, and everything in between.
You can calculate internal recruitment costs in a few different ways.
For example, say your company pays an HR employee an hourly wage. Assume that they work 50 weeks per year, taking 2 weeks off per year for vacation. A yearly figure for internal recruiting costs would look like this:
Internal recruiting cost = Hourly wage x (Number of hours spent on recruiting per week x 50)
For instance, say the employee’s hourly wage is $20/hour and they spend 10 hours per week on recruitment. The yearly cost for that employee is:
$20 x (10 x 50) = $10,000
However, imagine an HR employee is paid a fixed salary and recruitment is just one of their responsibilities. You can still calculate how much internal recruiting is costing your business.
First, calculate the employee’s hourly rate based on their annual salary and the number of weeks per year they work. Use the following formula:
Hourly cost = Annual salary / (Total number of hours worked per week x Number of weeks worked per year)
Let’s say an HR team member has an annual salary of $40,000, works 40 hours per week, and works 50 weeks per year. Their hourly cost is:
Hourly cost = $40,000 / (40 x 52) = $19.23
Next, find out the hours they work each week on recruitment—for example, 15. Then, complete their yearly figure for internal recruiting costs:
$19.23 x (15 x 50) = $14,422.50
Importantly, calculate the internal recruiting costs for each HR employee working on recruitment. This will give you your total internal recruiting cost.
Be careful that your HR team doesn’t spend too much time on recruiting relative to other areas, like payroll, as this can lead to employee burnout, delayed deadlines, and a domino effect on business costs.
The hiring manager usually gets involved from the interview stage onward to test candidates’ knowledge, skills, and abilities (KSA). Depending on the manager’s level of involvement and the seniority of the role, they could spend hours or even days on a shortlisted candidate.
If a hiring manager is paid an hourly wage, the annual cost of their recruiting activity is:
Hiring manager cost = Hourly wage x (Number of hours spent on recruiting per month x 12)
For instance, say they earn $50 per hour and spend, on average, 3 hours per month on recruiting. The annual cost is:
Hiring manager cost = $50 x (3 x 12) = $1,800
You can use this annual-to-hourly calculation for internal recruiters in the above formula, if a hiring manager is paid a salary.
Paying your existing staff members an employee referral fee is a great way to get high-quality candidates into your recruitment pool. Usually, the more senior the open position is, the higher the referral fee will be.
You can pay the referee either a flat fee for each successful recruit or a percentage of the recruit’s annual salary as compensation.
External recruiting costs
External recruiting costs include payments to third-party companies or contractors that support your recruitment goals. Include the following items in your external cost calculation:
External recruitment managers and agencies
Using an external recruiter or agency can get you a higher quality of hire. They can also help speed up the recruitment process, as they use specialized skills and candidate networks. You usually pay external recruiters a flat rate, a fixed-term retainer, or a proportion of the employee’s annual salary.
Job board posting
Online job boards such as LinkedIn and Indeed let you post and advertise job descriptions, increasing your pool of job-seekers. While there are free plans out there, you should include job board paid subscriptions in your budget if you’re looking for advanced features. These solutions usually have monthly or yearly fees. You may also pay extra to boost your job ads or add extra jobs.
Factor in any costs for promoting your business at career fairs or delivering employability events to attract candidates.
For example, a career fair organizer may charge you a flat or hourly rate, depending on how large your company’s stand is and the number of recruiters attending.
Remember to include only costs to external parties and exclude internal costs, such as costs for your staff’s time.
Aside from job boards, there are many other software solutions, such as Applicant Tracking Systems (ATS) that help you increase your candidate pool, speed of recruiting, and applicant suitability.
These are often priced per user, on a monthly or annual subscription basis. However, some vendors may have bespoke pricing or lifetime subscriptions available. Account for these costs if your business uses recruiting software.
Background checks help confirm applicant information, such as past employment and criminal records. It’s important to add them to your recruitment costs.
Some solutions charge on a monthly or annual subscription basis for unlimited checks, with add-on fees for special features. Others charge a flat fee for each background check.
To get the right person for the job, you may have to include relocation expenses in your job offer. Consider the candidate’s total cost of relocation, which may include commuting and/or accommodation costs. Then, offer full or part coverage of this cost.
Costs After You Hire an Employee
The total cost to hire a new employee must also include post-hire costs. Be sure to account for:
Base salary or wage
The base salary—or base wage, if your employees are paid on an hourly basis—is the minimum compensation earned by an employee before tax. It excludes benefits and overtime pay.
Normally, you budget this cost annually and pay it out on a monthly, weekly, or biweekly basis.
Employer’s share of taxes
As an employer, you must pay the federal taxes that apply to your business. Many companies pay taxes, including Social Security and Medicare, and Federal Unemployment (FUTA) taxes. Check what federal taxes your business needs to pay on the IRS website.
In addition, check your local and state labor laws to see if you’re liable for any additional contributions, such as state unemployment taxes.
Factor in the cost of optional benefits such as health and dental insurance, retirement plan contributions, and performance-related bonuses. State and local laws may require you to offer certain employee benefits.
Also account for paid time off (PTO), paid family and disability leave, and other types of paid leave, as you’re paying daily wages while the employee is absent. Consider the cost of other optional benefits your company offers, such as company-provided gym memberships, gift cards, and professional development stipends.
An effective onboarding experience is essential to preparing your new hire for their job. You should track how much it costs for your HR team to do tasks such as completing employment paperwork and planning the starter’s first week.
Calculate your annual onboarding cost per HR employee with the following formula:
Onboarding cost = Hourly wage x (Number of hours spent on onboarding per month x 12)
For example, say an HR employee is paid $20 per hour and spends an average of 10 hours per month on onboarding. Their annual onboarding cost is:
Onboarding cost = $20 x (10 x 12) = $2,400.
Add up each HR employee’s onboarding cost for your total annual onboarding cost. Then, divide that by the number of employees you hire in a year to get your annual onboarding cost per employee.
To better plan these costs, read our onboarding checklist.
Training enhances your workforce’s knowledge, skills, and productivity. It encompasses health and safety training, skills-based workshops, and role-specific sessions with experienced team leaders.
If training is provided by external specialists, you may be charged a retainer fee for a certain period of time or a per-session fee.
However, if internal managers deliver the training, use the formula below to calculate how much you’re paying annually for their time. For hourly employees, use the annual-to-hourly formula provided in the Hiring managers section of this article to find out their hourly cost.
Training cost = Hourly cost x (Number of hours spent delivering training per month x 12)
For example, say a manager is paid $50 per hour and spends 4 hours per month providing training. Their annual training cost is:
Training cost = $50 x (4 x 12) = $2,400
Training costs should also account for the cost of any equipment, tools, software, etc. that you use when delivering sessions.
IT equipment and software
Factor in the cost of any IT equipment provided to a new hire, such as a cell phone, tablet, or laptop. Also, include any fees paid to external or internal IT professionals if these devices require specialized setups.
In addition, include any software subscription costs associated with new hires. These may be priced per user or as a flat monthly fee.
How to Optimize Your Cost of Hire
Too little financial investment in hiring puts you at risk of not hiring the best people for jobs at your company. On the flip side, too much financial investment wastes resources that would benefit other HR areas.
Here are our top tips to ensure you’re spending just the right amount on hiring. Plus, we share tips on how to make sure the money you do spend on hiring doesn’t go to waste.
Create internal referral incentives
Internal employee referrals are 4 times as likely to receive a job offer compared to online applicants. They also represent between 30-50% of all hires in a company, according to research by Zippia. A one-off referral reward is cheaper than paying for internal or external HR specialists’ recruitment processes.
Referral rewards can be either a set dollar amount for each successful referral or a percentage of the new hire’s salary. Offer a figure attractive enough to be an incentive but lower than what you’d pay an internal or external recruiter per candidate.
Spread fixed costs across new hires
Some hiring costs are fixed, like HR staff salaries and job board subscriptions, up to a certain number of candidates. Where possible, use your internal and external resources to manage multiple applicants at a time to reduce cost per hire.
You can also consider booking interviewees for the same role in the same week to ease hiring managers’ decision-making. In addition, you might book new starters for group onboarding or training sessions to save on post-hire costs.
Prioritize employee retention
Effective retention helps avoid the cost of hiring employee replacements due to staff leaving voluntarily. The top reasons why employees leave their jobs include uncompetitive pay and benefits, a lack of professional development opportunities, not feeling appreciated, and having an unsupportive manager.
To combat this, start by making your compensation packages more attractive by including things like paid leave and retirement benefits. You should also provide opportunities for employees to learn and grow within your company. For instance, consider offering training courses so workers can cross-skill or upskill.
In addition, show appreciation using performance-based rewards such as prizes. Also, train managers in collaboration skills so your employees feel supported and included.
Minimize employee burnout
Employees can experience burnout due to the amount of work they need to do or the pressure they feel on the job. Burnout employees can become physically and mentally unwell and take time off to recover. Thus, you may need to find temporary workers in the short-term, or risk disrupting the business.
Instead of paying the cost of hiring employee replacements at short notice, ensure your team doesn’t burn out.
Do this by providing sufficient paid leave, including paid sick leave where appropriate, and offering mental health days off. You can also consider offering flexible working arrangements, such as allowing employees to choose their own job site or decide their own hours.
Finally, create a supportive culture where employees can share their thoughts and feelings openly. Regularly check in with your workers, either via email, in a phone call, or in a message. Let them know they can come to you with any concerns they may have.
It’s important to know how much it costs to hire an employee at your company. Before you hire, you must calculate internal and external recruiters’ pay, the cost of hiring managers’ time, job board fees, and relocation costs. After you hire, you need to account for the employee’s base pay, optional benefits, your share of taxes, training, onboarding, and IT costs.
Both underspending and overspending on hiring can lead to negative business consequences. However, understanding your hiring costs helps you use business resources more efficiently and even get better candidates. To optimize your costs, you should incentivize internal referrals and spread your fixed costs across new hires. And in the long term, prioritize employee retention and prevent burnout to ensure your costs aren’t wasted.