Just how much does it cost your company to hire a new employee? HR analytics expert Marco Padovani offers a plan to find out — and points out some of the danger zones you may have to navigate.
With compliance dates for the Affordable Care Act looming, understanding your true cost per hire is more important than ever.
In 2012, ANSI and SHRM approved a standard for calculating cost-per-hire. The basic formula is simple: Over a given time period, add up all of the external and internal costs associated with hiring and divide by the total number of new hires in that period.
But you know the devil’s in the details.
For instance: The SHRM metric specifies including the fully loaded costs of sourcing, recruiting and staffing new employees, but it also specifies non-labor office costs (e.g., representative portions of rent, etc.), learning/development costs for recruiters, and allocated costs for non-recruiting personnel involved in the hiring process.
How many of these costs can you easily access today? Not many, we’re guessing. But if you really want a true picture of hiring costs, you’re going to have to expect to devote a substantial amount of time running those numbers down.
It’s not a ‘magic metric’
Another factor to consider is the limitations of the metric itself. For example, there are naturally different costs associated with hiring people in different positions or geographies. Additionally, costs change over time. So, comparing a measurement last year to today might be misleading, as might be comparing raw measurements between a Wichita vs. New York office or between an R&D and a sales department.
Moreover, it’s important to consider the limitations of focusing on any one metric for decision-making processes. For example, the base ANSI/SHRM measurement doesn’t take into account the quality of the new-hires or the longevity of their employment. So, consider the situation where one organization consistently has a lower cost per hire than another, but the employees hired by the first one are terminated more frequently than from the other and are consistently rated lower in performance reviews. Focusing solely on cost per hire and not the other metrics (such as quality or longevity of hire) might lead to faulty decisionmaking.
So, as with most business metrics, evaluating and managing your cost per hire can provide you with significant benefits — but you need to ensure you’ve got all the crucial cost components covered and understand the limitations of the final outcome.
Marco Padovani is a systems developer at PDS, a Pennsylvania-based HR, Payroll, and Benefits software company.