Human resources is an essential investment in any business. Hiring the right people helps organizational growth and attracts success in all aspects of the business. As crucial as it sounds, hiring employees is a process that takes a lot of money, time, and effort to achieve and maintain.
Because of this, the cost of hiring employees is a complex factor to determine. Although yearly statistical studies have attempted to give an approximate value to help businesses prepare their labor budget. For 2023, the average cost per employee is said to have been $ 4,700, and it takes around 36 to 42 days to fill in a position.
But the real number for it will only be revealed in actual practice. To help you determine what that is, here is an article to guide you through the cost of hiring components and how to calculate it.
Cost for hiring formula – components
Knowing the real cost of hiring employees starts with identifying which components make up for the expenses. We will be categorizing these items based on the formula for calculating the cost of hiring below:
Cost per hire = (Internal Cost + External Cost )/Total number of hires
Internal costs
| Type of Internal Cost | Definition |
| HR Team | These are expenses associated with setting up and maintaining HR personnel to deliver the hiring and onboarding process. Expenses in this item will include their salaries. |
| Compliance | These are expenses associated with processing legal documents and seeking legal advice. This will often include notarial fees or lawyers’ fees to ensure hiring and onboarding is compliant. |
| Administrative Expenses | These are costs pertaining to the materials used to support the recruitment process. This will include office equipment, food, rent, electricity, etc. Determining the cost for this item might be challenging since most of the materials here are a shared resource for other operational functions. Companies need only to have an approximate cost of directly related items to come up with an amount for this item. |
| Training and Development | This pertains to the cost of training to upskill new candidates for their roles. This might include subscribing to online courses, hiring resource speakers, and even, hands-on training. |
| Referral Program | This added cost is often used by employers to incentivize employees who can refer potential candidates for the available positions. The expenses here will include the cash bonus that companies would offer to employees whose referral was hired. |
External costs
| Type of External Cost | Definition |
| Job Boards | These are expenses spent on advertising available positions in online job boards and even newspaper circulations. |
| Marketing | These are expenses spent in marketing your company’s job opening. It often includes paid ads on social media, SEO, and, etc. |
| Outsourcing Recruitment | Some companies rely on outsourcing their talent search with recruitment agencies to have a better reach. Expenses in this category will include the company’s payment for these out-house recruiters. |
| Candidate Screening | These expenses are associated with the tools used by employers to screen potential candidates. This will include automated interview platforms, assessments, and tests. |
| Background Checks | These expenses are additional costs to test further if a candidate is a perfect fit for the position. Most employers would often outsource investigators to perform this due diligence which includes educational checks, criminal records, immigration status, eligibility to work, etc. |
| Employee Onboarding Process | These are expenses associated with the employee’s entry into the company. These are costs for their paperwork, workspace set-ups, welcome kits, etc. For example, global companies using EOR and PEO services will have to itemize their subscription fee under this component. |
Total number of hires
This component pertains to the number of new employees you have taken in during a definite period. Determining the number for this category depends on what you want to calculate for. It could be the cost per hire of all new hires, or just your full-time workers, freelancers, contractors, or a combination of employee classifications. You can customize this part of the formula based on the data you want to gather.
Calculating the costs: steps and examples
Now that we have identified the expenses that need to be covered in the formula, let us go through the steps in calculating the cost of hiring an employee. To better illustrate the steps in this section, we will be using sample costs for each category and component.
Step #1: Gather financial information
The first step is to gather and locate your expenses during a period of your choosing. You may choose to calculate the monthly, quarterly, or annual cost of hiring an employee. For this exercise, we will be gathering the monthly costs of each component to determine the cost per hire for the month.
Step #2: List down your internal costs
List down all of the expenses under this category and the amount spent. You can easily do this in a spreadsheet or a simple table in a document. Consider the example we have below:
| Internal Cost | Amount (USD) |
| HR Team | 4,000 |
| Compliance | 2,500 |
| Administrative Expenses | 1,000 |
| Training and Development | 3,000 |
| Referral Program | 3,000 |
| TOTAL | 13,500 |
Step #3: List down your external costs
| External Cost | Amount (USD) |
| Job Boards | 2,500 |
| Marketing | 2,000 |
| Outsourcing Recruitment | 4,000 |
| Candidate Screening | 1,500 |
| Background Checks | 1,500 |
| Employee Onboarding Process | 3,000 |
| TOTAL | 14,500 |
Step #4: Calculating for the costs per hire
Now that we have calculated the internal and external cost, the next step is to divide it with the number of hires you have for the chosen time period. Suppose there are a total of six new employees joining the company, the cost per hire will be calculated as follows:
($ 13,500 + $14,500)/6
Cost per hire: $4,666.70
Considering the average we have pointed out at the beginning of this article, this example amount for cost per hire is just right! Capturing the budgets in a table as such provides employees with an overview on how to set their hiring budget moving forward. This allows them to set the metrics for their hiring team to observe and consider when looking for the right employees.
The Importance of calculating cost of hiring
Calculating the cost per hire will serve its purpose only if employers use the information to understand their business. Below are the advantages when knowing the cost of hiring an employee:
- Setting up recruitment and HR budget – The primary advantage of calculating the cost is that it provides the business with insights into the budget for recruiting new employees. This will help companies decide on which aspect to invest and which to cut. This also helps recognize improvement areas.
- Identifying recruitment challenges – As with any aspect of a business, recruiting employees is bound to undergo a lot of trial and error. However, knowing the cost per hire is a great way of determining which factors in the process are efficient and which needs more work. For example, if the tools you have invested in slows down an employee’s onboarding for more than a month, it might be the time to look for better alternatives.
- Measuring recruitment performance – This essential factor allows HR managers to provide a workable timeframe for their team to efficiently process recruitment and onboarding. The insights from the calculations will be of help for managers to set a hiring quota and motivate their team members to reach those numbers.
- Building an efficient recruitment strategy – Collectively, knowing the true cost of hiring an employee will allow business to strategically make hiring decisions from seasoned data. Potentially, it will refine their hiring process and allow them to save money along the way.
Let Multiplier help you cut down your hiring costs
Hiring an employee brings in a lot of effort on top of the costs. HR teams would need to ensure that the hiring process is seamless and a pleasurable experience for the talents they need. But with the varying internal and external costs that need to be factored in, hiring and onboarding becomes an all too consuming process to be streamlined without proper preparation.
However, Multiplier’s suite of solutions is tailor-made to make employee onboarding a hassle-free and cost-effective transaction. Our SaaS-based platform allows employers to get an estimated cost of an employee’s compensation and other benefits upon onboarding. Our legal team of experts is available 24/7 to guide you through the compliance aspect of hiring employees wherever they may be in the world. Moreover, our solutions come at a reasonable pricing plan.
To know more about how Multiplier can help your business’ hiring needs, book a free demo now.
