Why Cost Per Hire Matters
Cost per hire is one of the most widely used and most frequently tested HR metrics on the SHRM certification exams. It measures the total investment required to fill an open position, providing a baseline for evaluating recruitment efficiency, budgeting for future hiring, and comparing talent acquisition performance across departments, locations, or time periods.
SHRM and the American National Standards Institute (ANSI) jointly developed a standardized formula for calculating cost per hire (ANSI/SHRM 06001.2012). Understanding this standard formula and its components is important for both exam preparation and professional practice because it provides a common methodology that allows for meaningful benchmarking and comparison.
The Cost Per Hire Formula
The SHRM/ANSI standard formula for cost per hire is:
Cost Per Hire = (External Costs + Internal Costs) / Total Number of Hires
This formula divides the total costs of recruitment into two categories and then divides by the number of positions filled during the measurement period.
External Costs
External costs are expenses paid to outside parties as part of the recruitment process. These include:
- Agency and recruiter fees: Fees paid to external recruitment agencies, executive search firms, or contract recruiters
- Job board and advertising costs: Fees for posting positions on job boards, social media advertising, print advertising, and career fair participation
- Background check and assessment costs: Fees for pre-employment screening, drug testing, skills assessments, and other evaluation tools
- Relocation expenses: Costs of relocating new hires, including moving expenses, temporary housing, and relocation bonuses
- Signing bonuses: One-time payments offered to attract candidates to accept positions
- Technology costs: Applicant tracking system fees, career site hosting, and other recruitment technology expenses paid to external vendors
- Travel costs: Expenses for candidate travel to interview locations
Internal Costs
Internal costs are expenses generated within the organization as part of the recruitment process. These include:
- Recruiter compensation: Salaries, benefits, and overhead costs for internal recruiting staff, prorated to reflect time spent on recruitment activities
- Hiring manager time: The cost of time hiring managers and interview panel members spend reviewing resumes, conducting interviews, and making hiring decisions, calculated using their fully loaded compensation rates
- Employee referral bonuses: Payments to current employees for successful referrals
- Administrative costs: Time spent by HR coordinators, administrative assistants, and other staff supporting the hiring process
- Internal job posting systems: Costs of maintaining internal career sites and communication channels
A Practical Example
Let us walk through a sample calculation. Suppose a company made 50 hires in a quarter with the following costs:
External costs:
- Job board postings: $15,000
- Agency fees: $40,000
- Background checks: $5,000
- Assessment tools: $3,000
- Signing bonuses: $10,000
- Candidate travel: $7,000
Total external costs: $80,000
Internal costs:
- Recruiter compensation (allocated): $45,000
- Hiring manager interview time: $25,000
- Referral bonuses: $8,000
- Administrative support: $7,000
Total internal costs: $85,000
Cost per hire = ($80,000 + $85,000) / 50 = $3,300
This means the organization invested an average of $3,300 to fill each position during the quarter. According to SHRM benchmarking data, the average cost per hire across all industries and positions is approximately $4,700, though this varies significantly by industry, position level, and geographic location.
Using Cost Per Hire Strategically
Cost per hire is most valuable when used as a strategic tool rather than simply a tracking metric.
Benchmarking. Compare your cost per hire against industry benchmarks, competitors, and your own historical data. If your cost per hire is significantly higher than benchmarks, investigate which cost components are driving the difference. If it is significantly lower, ensure that quality of hire is not suffering due to underinvestment in recruiting.
Source analysis. Calculate cost per hire by recruitment source to evaluate which channels provide the best return on investment. If agency placements cost $15,000 per hire but employee referrals cost $3,000 per hire and both sources produce similar quality, increasing investment in the referral program makes financial sense.
Department and role analysis. Calculate cost per hire by department, location, and role level. This segmented analysis reveals where recruiting is efficient and where it is expensive, helping you target process improvements and resource allocation decisions.
Trend analysis. Track cost per hire over time to identify trends. Rising costs may indicate a tightening labor market, increasing competition for talent, or declining efficiency in the recruitment process. Falling costs may indicate process improvements, but they could also signal underinvestment that may affect hiring quality.
Budget planning. Use historical cost per hire data to forecast recruitment budgets for upcoming periods. If the workforce plan calls for 100 new hires and your average cost per hire is $4,000, you can estimate a recruitment budget of $400,000, adjusted for the mix of positions and expected labor market conditions.
Learn more about strategic HR metrics in our guide to HR metrics and KPIs.
Common Mistakes and Limitations
Understanding the limitations of cost per hire is important for both exam preparation and practice.
Overemphasizing cost. Cost per hire measures efficiency, not effectiveness. Minimizing cost per hire could lead to cutting corners in recruiting, resulting in lower-quality hires. Always evaluate cost per hire alongside quality of hire metrics.
Inconsistent calculation. If different departments or locations use different definitions of what costs to include, comparisons become meaningless. Adopt the SHRM/ANSI standard and apply it consistently across the organization.
Ignoring internal costs. Many organizations calculate cost per hire using only external costs because they are easier to track. This significantly understates the true cost of hiring and provides an incomplete picture of recruitment efficiency.
Averaging across dissimilar positions. A blended average that includes both entry-level and executive hires obscures meaningful differences. Calculate cost per hire by position level for more actionable insights.
Use our diagnostic tool to test your knowledge of cost per hire and other talent acquisition metrics.
Start Practicing Today
Cost per hire is one of the most practical and testable HR metrics on the SHRM exams. Mastering its calculation, interpretation, and strategic application demonstrates the analytical and business skills that modern HR professionals need.
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