Cost Per Hire: How to Calculate It, How to Control It

Cost per hire is one metric that is especially easy to lose sight of and underestimate, as these costs tend to overlap with existing business functions — paying HR staff, advertising, administrative work and so on. When you actually sit down and run the numbers, however, your total hiring costs for any given year can be eye-popping.

As of 2012, the standard definition of cost per hire is the sum of all recruiting costs (both internal and external) divided by the total number of hires. According to the Society for Human Resource Management’s most recent Human Capital Benchmarking Report, the average cost per hire for any type of business is $4,129. However, if you’re part of a large chain (“large” in this case being over 10,000 total employees), then you can expect that cost to be roughly halved.

In the leisure and hospitality industry, which includes restaurants and hotels, this individual cost is likely to be lower than average as the majority of positions are nonsupervisory and don’t have large expenses associated with them like relocation costs or lengthy training. However, because the turnover rate is nearly 50% higher than the average of the private sector, the total cost over the course of a year can definitely add up.

Calculating cost per hire

As with your basal metabolic rate, cost per hire is one of those things that’s almost impossible to get an exact number for, but doing a quick-and-dirty calculation that is close enough to be functional is actually pretty easy.

Here’s the simplest formula:

Keep in mind that costs and number of hires refer should both be calculated for the same period (e.g. month or year).

Internal costs

Internal recruiting costs are expenses “related to the internal staff, capital and organizational costs of the recruitment/staffing function.” These include, but are not limited to:

• Salary for any related HR and hiring personnel
• Salary costs of time spent hiring by other staff members (conducting interviews, screening applications, and so on — if this is too complicated, leave out)
• Any referral bonuses you might be offering to existing employees

External costs

External recruiting costs refer to expenses “incurred to external vendors or individuals during the course of recruiting.” These include, but are not limited to:

• Fees paid to outside employment agencies
• Fees paid to post job listings in newspapers or on websites
• Cost of drug screening and background check
• Fees paid and materials cost to attend any job fairs or similar events
• Cost of any required aptitude tests
• Cost of relocation
• Cost of any training period in which the new employee is not doing any productive work

Any costs after an employee is hired, such as training, is not included in the cost per hire calculation.

Total hires

The total number of hires could be measured differently across companies. However, these usually include all internal and external hires, both full and part-time, who:

• Went through a hiring process
• Temporary staff on payroll and promoted to a full-time position

Divide the total of all the recruiting costs by your number of new hires for that particular time period, and you now have a pretty good idea of your cost per hire, for that time period at least. If you do this on a monthly or quarterly basis, average your totals for a more accurate picture.

Controlling your cost per hire

OK, so you have a better bead on your cost per hire. Now, what can you do to bring it down?

Let’s start by addressing the elephant in the room that we touched on earlier: turnover. After all, if employees don’t leave, you’re not faced with the cost of replacing them. Annual employee turnover in the hospitality industry typically hovers between 70-75%, well above the average of about 45% for all other types of private sector jobs.

Combatting turnover starts with optimizing the hiring process. Many job seekers are now looking for jobs online via job boards and social networks. So why not leverage that to your advantage? Consider using niche job boards, like Sirvo, that not only make it easy for job seekers to apply for jobs but also provide business tools so that better hiring decisions can be made.

Another factor that contributes to turnover is that, for many people, a restaurant job is just something to pay the bills while they pursue their dream, and that isn’t going to change. However, employees don’t always leave because this is just a McJob to them; when they feel that management doesn’t listen or care, then there’s almost nothing to keep them from looking for greener pastures elsewhere. Little things that don’t cost much, like better communication and small incentives such as shift meals and performance bonuses, can go a long way. Likewise, the employee may no longer regard the job as disposable if a clear and realistic path to advancement is presented to them.

At the end of the day, knowing where your business stands in terms of hiring costs is crucial, especially in the hospitality and restaurant industry where employees at the heart of the business. So, get your expenses together and your calculator out!

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