It’s Monday morning and you’re at your desk scrutinizing the budget for the upcoming fiscal quarter. As you look over the numbers, a line item catches your eye—the amount allocated for hiring new staff. The figures seem higher than usual, prompting you to wonder: "Are we spending too much on recruitment?"

Enter the concept of cost of hire (CPH). It's a crucial metric that every HR leader should master. Knowing the total expense involved in recruiting, hiring, and onboarding a new employee. Tracking this helps you budget effectively—it also helps ensure that your recruitment process is as efficient as possible, improving your candidate experience. 

A lot can affect your average CPH, including size and location of your company to the industry and seniority level of the roles you're filling—so let’s walk through everything cost per hire entails. This includes breakdown of typical costs across the board and per industry, as well as a practical formula to calculate it. You'll gain insights into how to optimize your hiring budget and strategies, ensuring that you make data-driven decisions that support your organization’s growth and stability.

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. (More on the difference between those two costs in a minute.) Your final expenses depends on many factors, including:

• Size and location of the company
• Role and seniority level
• Industry

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:

Direct Costs

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.
They include:

Salary

This is the most obvious cost of hire. The salary of the new employee varies depending on their role and experience.

Benefits

Benefits costs are another part of new hire compensation packages. These costs can add up, but will vary depending on the benefits package your company offers.

Recruiting Costs

Typical recruiting costs include advertising, sourcing candidates, and conducting interviews. Recruiting costs can vary depending on the methods used to recruit candidates.

Onboarding

Providing the new employee with equipment, and access to resources to understand their job and company policies.

Training

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

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: 

Reduced Productivity 

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.

Turnover

If a new hire leaves the company early, the company may have to pay severance pay or incur the costs of recruiting and hiring another new employee.

Damaged Reputation

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.

Lost Productivity

If a position remains unfilled or is filled inadequately, projects may get delayed, affecting overall productivity.

Employee Morale

A poor hire can affect team dynamics, decreasing overall morale and potentially increasing turnover.

Rehiring Costs

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 analysis 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.

Average Cost Per Hire by Industry

The average cost per hire can vary greatly between different industries. In 2022, the national average was $2,700, according to the Saratoga Workforce Index. When it comes to entry-level and mid-level employees, studies show hiring costs are about 20% of a new hire's salary, according to The Hire Talent. 

We calculated the average cost per hire in specific industries using the 20% rule. Here’s a look at the average cost per hire by industry, as well as the factors affecting each:

Cost to Hire in Technology

It’s no secret that tech is a booming industry, and skills in this profession are in high demand. With rapidly evolving innovations and specializations, tech companies may be willing to pay extra to hire the best talent and stay ahead of competitors. 

As a result, the cost per hire for tech jobs tends to be higher than average. Software developers cost as much as $35,000 to hire. And—with an average tech salary of $111,193 in 2023—the attrition and replacement cost of an employee can be as high as $78,424.

Cost to Hire in Engineering and Manufacturing

Professionals with engineering skills are also in high demand. Many jobs within the engineering and manufacturing industry are considered an employee’s market, meaning workers have the advantage when it comes to securing employment. 

The average yearly salary in the engineering sector is $108,551, so hiring costs in that sector are $21,710. Hiring costs in the manufacturing sector are $10,378, per data collected by ZipRecruiter. 

Cost to Hire in Association-Professional Trades

Those with in-demand trade skills are harder to come by, resulting in higher costs to hire. These jobs include carpenter, electrician, line repairer, mechanic, millwright, welder, and more. They typically require contractor licenses or technical certificates or degrees. 

The average cost per hire for trade workers, then, is north of $12,000, thanks to a $61,185 average yearly salary, according to data collected by Indeed. 

Cost to Hire in Healthcare and Medicine

Health care is another moderate to high-paying industry, and health care workers are certainly in demand. Roles in this industry include doctors, surgeons, pediatricians, psychiatrists, pharmacists, and more. 

The average annual salary for health care workers is $70,835 per year, according to Glassdoor. That means hiring costs could average about $14,167.

Cost to Hire in the Legal Field

Legal roles require years of specialized education, and their salaries reflect that. The legal sector has an average yearly salary of $83,944, according to data collected by Glassdoor. That means the cost to hire legal employees can average $16,789.

Cost to Hire in Professional Services

Companies employing professional service workers include those that provide accounting, advertising, marketing, and consulting. While this sector encompasses many industries and types of jobs, the average annual salary is currently about $103,535, according to Glassdoor. Based on this salary, hiring costs typically come out to $20,707.

Cost to Hire in Services and Hospitality

The average cost per hire in this sector varies because compensation can vary quite a bit in this sector. Hospitality and service include people who work at restaurants and hotels as well as flight attendants and other roles. 

For example, according to Glassdoor, waiters earn an average yearly salary of $42,873. So, the average cost to hire a waiter is about $8,574. The cost to hire a flight attendant is nearly double that at $16,607 as attendants earn an average salary of $83,033 per year.

Cost to Hire in Arts and Recreation

Hiring costs in the arts can reach $13,770 when you apply the 20% rule to the sector's average salary of $68,850, according to data collected by Glassdoor. The average salary in the recreation sector is a bit lower at $50,315, according to Glassdoor. Thus, the average cost per hire for recreation jobs is $10,063.

The price of hiring new employees will vary from industry to industry, so do your research to verify you’re not over- or under-paying for your new recruits. Additionally, keep in mind that factors such as location and the economy will play major roles in the average costs per 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. 

Speak with a Wellbeing Specialist to strengthen your talent acquisition today!

References

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• Miller, Steven. (April 11, 2022). SHRM HR Benchmarking Reports Launch as a Free Member-Exclusive Benefit. SHRM. Retrieved May 16, 2024 from https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/shrm-hr-benchmarking-reports-launch-as-a-member-exclusive-benefit.aspx
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