How to Calculate and Analyze Hiring cost per hire

Hiring isn’t just about finding the right person—it’s about how much you’re willing to spend to do it. Every job post, recruiter fee, and interview adds up, making recruitment one of the most expensive HR functions. Yet, many companies treat these costs like a black hole, throwing money in without fully understanding what they’re getting in return.

That’s where Cost Per Hire (CPH) comes in. This metric isn’t just a financial calculation; it’s a crucial insight into your recruitment efficiency. If you’re spending too much, you need to optimize. If you’re spending too little, you might be sacrificing quality. In this guide, we’ll break down how to calculate cost per hire, analyze cost per hire, and—most importantly—use the data to make smarter hiring decisions.

Understanding Cost Per Hire

What is Cost Per Hire?

Cost Per Hire (CPH) is a key recruitment metric that calculates the total cost of hiring a new employee. It includes both internal and external expenses incurred during the recruitment process. Understanding CPH helps businesses manage hiring budgets, optimize resources, and improve hiring efficiency.

Why It Matters to Talent Acquisition?

A high or rising CPH can indicate inefficiencies in the hiring process, while a low CPH might signal cost-cutting at the expense of candidate quality. By tracking and analyzing CPH, talent acquisition teams can make data-driven decisions to balance cost, speed, and quality in recruitment.

The Cost Per Hire Formula: What Goes Into It?

At it's core the formulae is:

Cost Per Hire (CPH) = Total Recruitment Costs / Number of New Hires

Simple, right? Well, not so fast. The devil is in the details. Recruitment costs aren’t just about how much you pay a recruiter. They include a range of expenses, including:

Internal vs. External Costs in Hiring

To accurately calculate Cost Per Hire (CPH), it's essential to distinguish between internal and external costs.

Internal Costs

These are expenses incurred within the company during the hiring process.

• Recruiter Salaries: Compensation paid to in-house recruiters and HR personnel.
• Training Costs: Expenses related to onboarding and skill development for new hires.
• Hiring Manager Time: The hours managers spend interviewing and evaluating candidates.
• Technology & Tools: Costs for applicant tracking systems (ATS), HR software, and background checks.
• Employee Referral Bonuses: Incentives given to employees for successful candidate referrals.
• Office Space & Equipment: Costs associated with interviews conducted in-office and tools provided to new hires.

External Costs

These are expenses incurred outside the company to attract and acquire talent.

• Job Board Fees: Costs for posting job listings on LinkedIn and Indeed.
• Recruitment Agency Fees: Payments to third-party recruiters or staffing agencies.
• Advertising & Marketing Costs: Paid social media promotions, sponsored job posts, and recruitment campaigns. 
• Candidate Travel & Relocation: Expenses for flying in candidates or relocating hires.

Pre-Employment Assessments: Fees for background checks, skills tests, and psychometric assessments.

The actual formulae looks like this

Cost Per Hire (CPH) = (Internal Costs + External Costs) / Number of New Hires

For example, if internal costs = $10,000, external costs = $5,000, and you hired 5 employees, then:

CPH = ($10,000 + $5,000) / 5 = $3,000

Step-by-Step Calculation Process

To ensure accurate calculations, follow these steps:

1. Identify all hiring-related expenses (e.g., recruiter salaries, job postings, software subscriptions, travel for interviews). 
2. Categorize costs as internal or external (refer to the table above).
3. Count the number of hires over a specific period (e.g., quarterly, annually).
4. Plug the numbers into the formula to determine cost per hire.

The challenge lies in tracking every single cost accurately and deciding whether to include indirect costs, like lost productivity during training. This brings us to the next crucial question: how do we make sense of these numbers?

How to Analyze Cost Per Hire: More Than Just a Number

A number in isolation means nothing—context is key. Analyzing cost per hire requires benchmarking, trend analysis, and a keen eye for optimization. Here’s how to break it down:

1. Track Cost Per Hire Over Time

Your cost per hire today may not be the same as it was last year. A sudden increase might signal inefficiencies, while a drop could indicate cost-saving measures are working. Use HR dashboards and analytics tools to visualize trends.

For instance, if your cost per hire increased from $8,000 to $12,000 in a year, ask:

• Did we shift to more expensive recruitment channels?
• Are hiring managers spending more time in interviews?
• Did we experience an increase in candidate drop-off rates?

2. Benchmark Against Industry Standards

Knowing your own cost per hire is great, but how do you stack up against competitors? According to the Society for Human Resource Management (SHRM), the average cost per hire across industries is around $4,700, but this can vary widely depending on industry, company size, and job level. Tech firms, for example, may have a much higher cost per hire due to intense competition for talent.

3. Break Down Costs by Hiring Channel

Not all recruitment methods are created equal.

• Recruiting tools help automate processes and optimize sourcing strategies at minimum cost.
• Employee referrals tend to have the lowest cost per hire and best retention rates.
• Job boards like Indeed and LinkedIn may yield high volumes but can be costly.
• External recruiters are useful for niche roles but drive up expenses significantly.

By analyzing your cost per hire by channel, you can identify where to double down and where to cut back.

4. Compare Cost Per Hire with Other HR Metrics

Numbers don’t lie, but they do need context. To understand whether your hiring process is truly cost-effective, compare cost per hire with:

• Time to Hire: A longer hiring process may mean higher costs.
• Quality of Hire: High-cost hires may be justified if they perform exceptionally well.
• Retention Rates: A lower cost per hire isn’t necessarily better if employees leave within months.

For example, if a company slashes hiring costs but sees an increase in turnover, that cost-saving effort might actually backfire.

The Hidden Costs: Why Cutting Corners Can Cost You More

It's tempting to focus on minimizing recruitment costs, but short-term savings can lead to long-term headaches. Hiring the wrong person because you skimped on vetting costs can lead to lower productivity, cultural misalignment, and even turnover costs that exceed your original hiring budget.

A study by the U.S. Department of Labor suggests that a bad hire can cost at least 30% of the employee’s annual salary. So, while reducing cost per hire is a worthy goal, it must be done without compromising hiring quality.

Tools to Optimize and Reduce Cost Per Hire

Luckily, modern HR technology can help streamline recruitment without cutting corners. Consider:

• Talowiz Ai agents: Intelligent agents that understands recruiting. Just tell them what you need - screening, scheduling, and sourcing, cutting recruitment costs without compromising quality.
• Workday & SAP SuccessFactors: Automate tracking of recruitment costs and streamline hiring processes.
• LinkedIn Talent Solutions: Leverage AI-driven candidate matching to reduce reliance on expensive external recruiters.
• Employee Referral Platforms: Tools like Teamable encourage referrals, which are cost-effective and yield high-quality hires.
• HR Analytics Dashboards: Platforms like Tableau or Power BI help visualize cost trends and identify inefficiencies.

By using data-driven recruitment strategies, companies can reduce wasteful spending while improving hiring outcomes.

Smarter Hiring Starts with Smarter Metrics

Cost per hire isn’t just a financial figure—it’s a window into your company’s hiring efficiency. By accurately calculating, continuously analyzing, and strategically optimizing cost per hire, organizations can make smarter hiring decisions that balance cost, speed, and quality.

So, next time someone asks, “How do you calculate cost per hire?” you won’t just give them a formula—you’ll give them an answer rooted in strategy, insight, and a touch of HR wisdom. And that’s worth every penny.