Recruitment Guide (Part 1): How to Calculate Recruitment Costs

Every business needs to recruit employees – they are the ones that keep a business up and running, make it thrive and determine how successful it will be in the future. However, bringing in the best and the brightest talent to your business always comes at a price.

But how much does recruitment cost?

When calculating a company’s recruitment budget and cost per hire, most HR leaders and hiring managers will take into account the agency fees, the advertising costs and the salaries of in-house recruiters. Is that all, though? Do those factors represent to the fullest the real recruitment costs of an organisation? In fact, they don’t.

Admittedly, recruitment can be expensive and that’s the main reason why recruitment professionals are in constant search of more cost-effective ways to hire new employees into their business. However, most companies underestimate the cost of recruitment by 90-95% when they are looking to cut down expenses and this often leads to terrible decisions.

In order to efficiently reduce your recruitment costs, the first – and most important step – is understanding all the different factors and expenses that may have an effect on your recruitment budget.

In the first part of this guide, Templeton’s tech recruitment specialists uncover all there is to know about recruitment costs to help you plan your budget, monitor your cost per hire and optimise your spending.

Without further ado, let’s find out how much recruitment is costing your company.

Don't miss out Recruitment Guide (Part 2): How to Reduce Recruitment Costs

Recruitment 101: Understanding your Cost per Hire

Before you can decide which strategies you’re going to implement to reduce your hiring costs, you need to understand first how much replacing an employee or making a new hire is actually costing your company.

• What is a Recruitment Budget?

The recruitment budget allows your company to consider the cost of recruiting in light of the value of the employee (salary). This way, you can tailor your recruiting investment depending on the type of role you are trying to fill with a hiring budget.

• How to Calculate Your Recruitment Budget?

There are two ways to calculate your recruitment budget:

1. By using your average cost per hire: Add up your company’s recruitment expenses from the previous year and divide the sum by the number of hires you made. Then, multiply your average cost per hire by the number of hires you plan to make this year.
   
2. By adding all your projected internal and external costs: This is a tricky one, as it is essential not to miss any of the factors that could end up affecting your recruitment budget. Some factors, like the number of hires you’re planning to make or the amount of money you have decided to spend on job ads, may be easy to control and calculate. Some other factors, though, are harder to project, such as your staff turnover rates.
   

• What is Cost per Hire?

Cost per hire (CPH) is a metric used when creating or tracking your recruitment budget and it equals the sum of your internal and external recruiting costs, divided by the total number of hires within a given period of time (typically one year). The metric is quite simple to understand and quite important when evaluating the cost-effectiveness of a company's hiring process and efforts.

• Calculating your Cost per Hire

To be able to calculate your cost per hire, you need to be aware of your internal and external recruitment costs.

• The internal recruitment costs are any expenses relating to the internal employees of a company and the costs of the recruiting process. These may include your recruiters’ salaries, interview costs, employee referral bonuses and money you spend on training your hiring team.
  
  
• The external recruitment costs refer to any payment made to external vendors associated with your recruitment process. These costs may include job board and external agency fees, advertising costs, recruiting software, as well as background check service fees.

Once you know these numbers, the cost-per-hire formula makes it easy to calculate your recruiting expenses for a specific time period.

For example, if you plan to hire ten new employees within this year and you have estimated your internal and external recruitment costs to be £35,000, then your cost per hire will be £3,500.

• Cost per Hire Benchmarks

Society of Human Resource Management (SHRM) estimates that the average cost per hire for U.S. companies is $4,425 for a non-executive role and $14,936 for an executive. For the UK, the average cost of recruitment for a new candidate is £3,000.

However, there are several factors that may affect each company’s average cost per hire, as it depends on the organisation’s hiring volume. Also, some roles (e.g. engineering) require longer to fill, resulting in higher accumulated costs per hire. In conclusion, depending on the size of the company and the industry in which it operates, a good cost-per-hire benchmark can range from £2,500 to £4,000 ($3,000 to $5,000 U.S.). Knowing this metric can help you make more strategic decisions to lower recruitment costs.

Wondering What Candidates Want from Employers in 2022?

What’s the Real Cost of Losing an Employee?

Employee turnover (the rate at which employees leave your organisation and are replaced by new workers) is a big challenge for companies of all sizes – from small businesses and non-profits to Fortune 500 organisations. Employee turnover can be classified into two categories: voluntary and involuntary.  

Regardless of the nature of the turnover, though, losing an employee can have a direct impact on staff morale and productivity, as well as on the company’s revenue and profitability. In addition, it can cost your organisation big money and there is strong evidence that supports these facts.

Studies have found that the average expense to replace an entry-level employee can be up to 50% of their salary, whilst, for a supervisory role, the replacement cost could go as high as 150% of their annual salary. Many factors contribute to these high percentages, including not only the direct costs of replacing an employee but also the indirect costs of losing a staff member. These factors include:

• Lost Knowledge: 57% of knowledge workers surveyed by Future Forum stated that they are open to seeking a new job, leaving a significant knowledge gap in their companies.
• Lost Productivity: Across almost all industries, hiring experts estimate that it takes approximately three months for new hires to reach full productivity at work. More importantly, they may need up to two years to reach the same level of productivity as an existing employee.
• Cover for Exiting Staff: As the company prepares to recruit new candidates, overtime or temporary workers might be needed to cover for this gap period.
• Impact on Employee Morale: Turnover can create uncertainty for the remaining workforce. This can create low morale, decreased motivation and lost engagement.
• Customer Service Disruptions & Errors: New employees are less adept at solving problems and often take longer to complete their work. Consequently, a decline in customer service can cause a loss in profit for the business.
• Recruiting Costs: The recruiting efforts for hiring a new employee, such as vacancy promotion, screening and interviewing, can sometimes add up to more than 40% of that employee’s base salary.
• Onboarding Costs: 40% of EMEA’s (Europe, Middle East & Africa) companies report that their onboarding process typically lasts for one to three months, which includes training and management time.
• Training Costs: An employee's training costs can be up to 10% to 20% of their salary over their first two to three years in the company.

In view of the above, there’s no surprise that the biggest concern employee turnover presents is its financial costs, from recruiting and training new employees to replacing the ones you’ve lost. In fact, some studies show that every time a business replaces a salaried employee, it costs them six to nine months’ salary on average.

Discover more on How to Improve Employee Retention.

What’s the Real Cost of Hiring an Employee?

The cost of hiring an employee is arguably one of the most expensive parts of running a business. Many people have difficulty grasping this fact, as it's easy to forget that the cost of hiring a new employee extends beyond just their salary.

• Cost of Recruiting

There are various potentially high costs just in the process of recruiting. These include internal and external costs, as well as some hidden expenses that many companies tend to dismiss, like the time cost of a hiring manager when performing recruitment-related tasks.

• Job Board Fees: These are one of the most common costs to think about when you want to advertise a job opening. The amount of money that you might pay each time varies wildly between which sites you use (roughly £200-£400 if you use LinkedIn).
• Career Page Costs: These expenses may include the setup, maintenance and redesigning of your careers page.
• Promotional Costs: The expenses your company makes on attending/hosting career events, promoting job ads on social media and press, etc.
• External Recruiter Costs: Many small to mid-size companies don’t have an in-house HR team, so they enlist the help of outside recruitment support. Most recruiting agencies and staffing firms work on a performance model, getting paid only when they make the right hire. The price of such service ranges anywhere between 15 to 25% of the employee’s annual salary.
• Internal Recruiter Costs: This is often the highest recruiting line item and it includes the recruiters’ salaries, benefits and travel expenses. Larger companies have at least one HR manager on their team, with an average salary of £48,183 per year, according to Glassdoor.
• Time Spent on Recruiting: Remember that time is money? The time your hiring team spends on setting up job ads, putting them out on job boards, screening and sourcing candidates, assessing, interviewing and making them an offer comes with its own price.

Find out the Top 5 Hiring Trends for 2022 and How HR Leaders Should Adapt.

• Cost of Salary & Benefits

The salary is the obvious cost of a new employee. The width of the wage range can vary depending on the role, the industry, the country and the level of seniority of the new hire. Regardless of the case, when calculating your ongoing cost to hire, you need to always consider the following cost aspects:

• Core salary
• Taxes (e.g. National Insurance)
• Benefits (e.g. Pension, Private Insurance)
• Bonuses (e.g. Performance bonuses)

According to Boston Business Journal, the salary plus benefits usually totals in the 1.25 to 1.4 times base salary range. Therefore, the salary-plus-benefits package for an employee who makes £50,000 a year could equal £62,500 to £70,000. And most employees expect their salaries to rise over time.

In addition, along with a new hire comes the possibility of a demand for an increased salary. According to the University of Pennsylvania, external hires demand 18-20% more in salary than internal hires.

• Cost of Onboarding & Workplace Integration

The money a company spends on onboarding new employees is often overlooked. However, onboarding and workplace integration can be quite costly. These costs may include:

• Expenses on IT Equipment: Laptop or computer, phone, software licenses, etc.
• Cost of Space and Other Equipment: Physical space like an additional office, desk and chair, as well as any special equipment or resources required for the job.
• Cost of Employee Support: The amount of time other team members spend to support a new employee is equivalent to the amount of money the company is losing. For example, managers will have to develop and deliver the induction programme, place the new hire in the right team and review with them the company’s policies and procedures instead of focusing on other tasks that could bring the organization direct revenue.

Of course, there are not only the direct costs that companies have to consider. Losses in productivity can be fairly significant. In fact, during the first months of a new hire, the employee is costing more than they are earning for the company. And it might take up to 26 weeks for them to reach full productivity levels.

• Cost of Training

After placing the right person in the right role, businesses need to provide adequate training to enable the new employee to do the work and start generating revenue. Companies may offer either in-house training or funding for online courses and external training programmes.

Considering that an average UK company spends over £1,000 per employee on orientation, on-the-job coaching and upskilling courses, it’s no surprise that training is viewed as one of the costliest investments a company can make.

• Other Expenses

While most new employees come through your HR team’s recruitment efforts, job boards or external sourcing agencies, there are other ways to find new candidates. Referral programmes and talent events may also add up to your acquisition expenses. When running a referral scheme, for example, you should include in the costs not only the bonuses you’re offering to employees who refer someone but also the hours your team will spend managing the programme.

Costs associated with background check services (e.g. ID, DBS and reference checks), drug screens and pre-employment assessment tests should be also taken into account when calculating your recruitment budget.

What’s the Cost of Hiring the Wrong Candidate?

Take a step back for a second and think of all the factors, the time and energy, as well as the costs involved in recruiting a new employee. Now, imagine having to go through all that again, just because you made the wrong hire for your business.

Best case scenario, all the recruitment efforts, the time and the money spent on hiring will double. And that’s only if you get it right the next time around. The average cost of a bad hire is up to 30% of the employee’s first year compensation. On top of that, you’ll also have to consider the effects of that hire on staff morale, productivity and customer satisfaction, which may vary on the time that employee has been working for your company until they resigned or got fired.

Hence, hiring the right person and implementing efficient recruitment and retention strategies are key to keeping your sourcing and hiring costs low.

How to Optimize your Hiring Costs

To sum up, it doesn’t really matter whether you’re hiring to replace your losses in staff or to better cope with the increased needs of a new project or a business expansion. The outcome is the same: The cost of recruiting employees is high.

Additionally, with the Great Resignation being an ongoing economic trend, recruitment will continue to be a big part of running, managing and scaling a business. Knowing how much recruitment is actually costing you is the first step to hiring better and cheaper.

Templeton have 25 years’ experience recruiting highly skilled Engineers, Programmers, Developers and IT Specialists across the world – find out more about our award-winning tech recruitment services.

Don’t miss out on the second part of this guide to discover seven cost-efficient strategies that will help your company cut down on recruitment costs without having to compromise on the quality of the hire.