Recruitment Costs Calculation

Formula for Hiring Costs

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The formula for calculating hiring costs will, to a large extent, be unique to each company’s circumstances and be dependent on their acquisition strategies, application process, assessment methodologies, interviewing protocols, reference checking, quality of hire and retention rates. If we look at some key variables you might like to put a cost against each and come up with your own personal formula. 
(Update 15/12/12 – Following a comment below, I have now created a worked-example which you are welcome to download and modify to suit your circumstances – Download Calculator)

Acquisition Strategies:

  1. Advertising – preparation time, job boards, print media, networks?
  2. Do you use recruitment agencies?
  3. Employee referrals  – do you pay a bonus?
  4. Passive candidate search – how much time spent?  Any fees for access to databases?
  5. Previous  applicants – do you have a searchable database?
  6. Employer branding – Do you maintain careers portals on website, LinkedIn and social media?
  7. Do you have a regular careers day?
  8. Do you have a social media strategy and budget?
  9. Do you have a graduates’ program?
  10. Do you have sign-on bonuses?
  11. What are the costs of any other benefits you offer?

Application Process:

  1. Do you accept email? – this is the most difficult to manage and very costly in time
  2. Do you have an ATS (Applicant Tracking System)? – online applications and tracking saves a lot of time
  3. Do you have an AMAS (Applicant Management and Assessment System)? – much faster and better than ATS
  4. Do you notify all applicants of the outcome? – this is an important investment in your employer brand and is easy to do with an ATS or AMAS

Assessment Methodologies:

  1. Reading resumes – In a recent survey, 20% of job-seekers admitted their resumes contained lies, 27% exaggeration and 21% said they loaded keywords to trick automated resume scanning. Resumes tend to be a poor indicator of on-the-job performance and can lead to wasting time on interviews or overlooking the better candidates.
  2. Screening questions are so much better (as long as the answers don’t become mini-resumes).  Can help to quickly identify those with the right skills, experience, qualifications and knowledge.
  3. Attitude assessment – if you use a tool specifically designed for recruitment you can improve selection and optimise quality.  A very worthwhile investment.
  4. Benchmarking – do you have a way to compare applicants to your best performers in the role?
  5. Practical tests – e.g. welding, data entry, electrical fault-finding etc.  Each has a cost but can be invaluable.
  6. Probation period – the final assessment – any failures at this stage are a huge cost to the organisation – no one is perfect and you might like to factor in a failure rate.

Interviewing protocol:

  1. Do you telephone interview?
  2. Do you video interview?
  3. Do you interview one-on-one or in-panel?
  4. Do you second interview?
  5. Do other managers interview?
  6. Do short-listed applicants have a site visit?

Reference checking:

  1. Do you bother?
  2. Do you settle for one positive contact?
  3. Do you insist on two?
  4. Do you persist for three?
  5. Do you use background checking agencies?
  6. Do you check validity of qualifications with the issuing institution?
  7. Do you need police checks?
  8. Do you need drug & alcohol screening?
  9. Do you need medical checks?

Quality of hire and retention rates:

  1. Time to hire – some vacancies are well planned and you have ample time to resource.  However, many times the position has to be filled immediately and every day lost is a direct cost to the company.
  2. Do you have to pay relocation costs?
  3. Time to induct – every new recruit will take some time to come up to full productivity and will hamper other employees until they do.  This is a major cost and it is inversely proportional to the investment made in the preceding steps.  It is a good metric to monitor if you are not doing so already.
  4. Probation completions – some people monitor how many recruits fail to complete their probation as a ‘quality’ measure.  Earlier I did suggest factoring in a failure rate for cost purposes but I do not advocate this as a metric.  I much prefer the positive metric of ‘full productivity’ or ‘time to induct’.
  5. Cost of a bad hire – various research papers put the cost of a bad hire anywhere from one to five times the annual salary for the position depending on the significance of the role within the company.
  6. Retention rates – this is a high cost for any company.  Staff turnover not only triggers the entire recruitment cycle again, it also means a loss of expertise and knowledge and may harm morale.

Formula for Hiring Costs Comments and Feedback

I doubt if this is an exhaustive list and others might like to suggest further line items.  Please feel free to comment.

7 thoughts on “Formula for Hiring Costs

  1. Congratulations David, this is one of the most comprehensive lists I have seen. I am sure most people only look at the direct cost of the recruitment process itself.

    Another cost I can think of is the loss of knowledge when someone leaves. This can be particularly costly if they take that knowledge to a competitor.

    Other cost calculations I have seen put the costs anywhere from $5,000 to $50,000 depending on seniority but I don’t think they take into account all the factors you have listed here. Have you got a worked example of your formula that I could have a look at?

    1. Thanks John,

      You make a good point with the ‘loss of knowledge’ being a massive cost for companies particularly when taken to a competitor. I had actually allowed for this but tried to make it a positive metric by calling it “Staff Retention”. However, I agree that for the purposes of cost impact, we should label it for what it is, “Staff Turnover/Loss of Knowledge”.

      And yes, I too have seen a wide range of cost calculations and believe that most haven’t considered the overall impact on the business. Many calculations are primarily used to set a budget and typically only look at the direct costs divided by the number of jobs per year. Sadly this misses the whole-of-business impact that recruiting can have – either good or bad as the case maybe. If the manager recruits well, the new hire inducts more easily, is more productive and usually stays longer, all of which adds greatly to the prosperity of the business. And, reduces the volume of recruitment.

      This article was written in response to a question on one of the LinkedIn groups and as such I don not have a ‘worked example’. However I will convert the article into a spreadsheet and run a sample calculation as a worthwhile exercise. I notice that you have subscribed so you will see the spreadsheet as soon as I post it. Should be within a few days.

      Best regards,
      David

      1. Hi John,

        I have now turned this into a spreadsheet and created a worked example which you can download from our Resources tab.

        You can change any or all of the entries to suit your particular circumstances to arrive at an average cost for your company. You will have to ‘guesstimate’ some items but don’t under-value the impact of staff turnover – you will find that a small improvement here will deliver big returns.

        I do hope you find the spreadsheet helpful. Let us know how it works for you and if there are any improvements you have made.

        Best regards,
        David

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