Cost Per Hire – Calculating Hiring Cost in Recruitment

Cost per Hire meaning

The Recruitment process costs organizations dearly. The cost per hire means the total cost incurred for hiring purposes for each hire. This includes among other things, the following costs

  • Time Cost of the HR Managers & the technical managers involved in the Recruitment Process
  • Payments made to placement Consultants
  • Payment made to buy Resumes online
  • Cost any on-campus institution drives
  • Cost of joining bonus and relocation allowances
  • Expenses incurred on conducting recruitment tests and interviews
  • Cost of overtime or temporary staff retraining during the period when jobs remain vacant
  • Any other incidental cause availed by the selection  team,  we can / overtime lunch/dinner transport claims and the like

To these may be added cost and expenses related and involved in the recruitment process.

The cost to hire or cost per hire is obtained by dividing the total cost by the number of hires.  Organizations closely watched the cost per hire to monitor the effectiveness of the hiring function.  Efforts are always made to keep the cost per hire within acceptable limits.  Cost per hire varies from organization to organization, deciding factors being skill level of hires,  demand and supply of such skills, number of fires, sourcing strategy,  and compensation levels.  Change of Sourcing strategy and withdrawing joining bonuses are common strategies used by organizations to keep the cost per hire within desired norms.

COST TO HIRE OR COST PER HIRE = TOTAL RECRUITMENT COST/TOTAL NUMBER OF HIRES

TOTAL RECRUITMENT COST = TOTAL INTERNAL RECRUITMENT COST + TOTAL EXTERNAL RECRUITMENT COST

INTERNAL SOURCES OF RECRUITMENT

  • Present employees – One of the most sought after internal source of recruitment methods are present employees, which has proven to be beneficial in various ways.  In this type of recruitment, the cost of training might be less,  but there is an added cost of providing the promoted employee with a higher pay scale. This is the most common internal source of recruitment,  wherein the organization need not look for new employees,  the organization can appoint one of their efficient employees to a higher position or a different department where they can work efficiently and get the system running smoother. For an existing employee, he/she is acquainted with the organizational culture and systems which cuts down the retraining cost. But in cases of promotions,  when an existing employee is getting promoted to the next level in the hierarchy, he/she is to be paid a higher salary which is the cost the organization needs to bear for this kind of recruitment.
  • Employee referrals  Over the years with strong networking being built, this source of internal recruitment has proven to be very effective, where employees can encourage their families and friends by familiarizing them with the advantages of a job with the company, furnishing cards of introduction and even encouraging them to apply. Some companies even offer “finders fees”  in the form of monetary incentives for successful referrals. For example, companies like Microsoft offers referral incentives to its employees for internet experts. Infosys in Bangalore also has a practice of coming up with vacancies on its website, inviting referrals from employees. Employees are paid Rs.10000 to Rs.15000 charges for every successful hire. Finder’s fees could be referred to as the cost related to this sort of internal hiring. If used wisely, employee referrals could prove to be an effective way of recruiting. The prospective reach is wider at a very low cost and in an organization with a large number of employees, this approach can provide quite a large pool of potential organizational members.
  • Former employees – Another internal source of applicants are former employees. Increasingly more and more employers are reaching out to ex-employees and sharing information on job openings organizations. They maintain close contact with ex-employees with proven good performance records.  The advantage of recruiting former employees is that they are quick to hire. These hires are quick to work as they are familiar with the company’s policies and procedures and will connect soon with peers and customers. MNCs purchase IBM and Microsoft are active in re-hiring. The problem with this internal source of recruitment is their placements and compensation. Often, we have seen that former employees re-joining ask for a higher pay scale which gets added as an internal cost to hire.

EXTERNAL SOURCES OF RECRUITMENT

  • Temporary/Contract workers  contract workers by then a number are almost working the small number of regular employees.  For employers, contract workers are less expensive. Wages paid to these employees constitute only half of what is paid to regular employees with minimal demands for better wages and benefits and no need to implement mandatory welfare measurements. During times of sudden rise in demand or uncertainty, organizations rely on temporary workers instead of hiring regulars. Temporary or contract workers insulate permanent employees from downturns in a business cycle, thereby improving job stability. This is one of the most affordable external sources of recruitment with minimal costs related to it.
  • Campus recruitment – Placement programs in Colleges, Universities and Research Laboratories, sports fields, and institutes are a great opportunity for recruiters to hire budding talents with young perspective, particularly the institutes for top campus recruitment is going Global with companies like Hindustan Unilever, Citibank, HCL HP,  Facebook and Reliance looking for in global market campus recruitment is so much sought after by the recruiters that each College University Department or Institute will have to have a placement of a to handle recruitment functions. This type of external recruitment is often an expensive process, even if the recruiting process eventually produces job offers and acceptances. For conducting on-campus recruitment programs, there needs to be a contract between the university/institute and the company/organization.  There are cases where colleges charge a lot of money for the companies to arrange employment fares or get a seat in the placement cell for external recruiting purposes. This could be considered as the cost related to campus recruitment.
  • Advertisements – This is the most popular method of seeking recruits, as many recruiters prefer advertisements because of their wide reach. Want as described the job and the benefits, identify the employer and tell those who are interested and how to apply. A number of factors influence the response rate of an advertisement. Three important variables to be kept in mind are – identification of the company, labour market conditions, and the degree to which specific requirements are included in the advertisement. Moreover, we can say that an organization can customize the advertisement as per their requirement, which demands some investment. This is one of the major elements in the cost of recruiting not only because it is the most common method of the external source of recruitment irrespective of a paper print advertisement or advertisement on an e-recruitment website, but also it opens up a wider pool of potential candidates who would prove to be an asset of the company.
  • Job Boards: Job portals allow access to their database on payment of a Fixed Fee. Companies can also post their Job openings on Top Job Posting Sites in India.
  • Recruitment Companies: Unlike Job-boards that mostly ask for a prepaid fee, Recruitment Consultants usually work on a success fee model. This means that you only need to pay to Recruitment Firms once you have made a successful hire via them. Here’s a list of Top Recruitment Companies in India you can engage with for your next hire. Their Fee varies from 5%-25% of annual CTC of the selected candidate.

The above were a few of the elements in the recruitment cost Inclusive of both internal sources of recruitment as well as a cost related to the external source of recruitment.  Now to find out the cost to hire or the cost per hire, the total recruitment cost is to be divided by the total number of actual hires, which roundabout gives an idea of the cost involved in hiring from a financial perspective.

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