Recruitment cost: how to calculate and reduce it

Recruitment costs – a lot. But you know what costs the same (or more)? Under-skilled employees, a high turnover, low productivity, bad brand reputation and other not so funny things that happen when your recruiting strategy and processes are not top notch. It’s quite obvious: recruiting is a crucial component for the success of any organization. 

Understanding the costs associated with recruiting – aka how much recruiting really costs – and managing them effectively can make the difference between an efficient hiring process and a costly one.

In this article, we will explore the various costs of recruiting, how to calculate them, and strategies to reduce the expenses – without sacrificing effectiveness and candidates quality.

Recruitment cost refers to all expenses incurred by a company to attract, select, and hire new employees.

These costs can include direct and indirect expenses such as HR staff salaries, job advertisement, travel costs for candidates, and – we will see – much more. However, it’s not only a matter of money: time and effort – resources which need to be allocated from other activities, therefore “opportunity costs” – are other crucial factors.

Calculating the cost per hire or the recruitment cost ratio is something that any middle school student can do. But the difficulty for companies in establishing the budget for a hiring lies precisely in not being able to focus on a complete overview of the costs.

Let’s explore the main expenses to consider.

Let’s put aside time and effort – intangible costs that must be translated into monetary ones – and take into account all the real costs.

We should ask ourselves: in how many ways is hiring costing me money?

Probably in many of the following – plus with some hidden costs we’ll discuss later.

Advertising – This is painful, sorry CFO

Advertising costs include expenses for posting job vacancies on various platforms such as online job boards, LinkedIn, and print media.

Recruitment agency fees – Whoopsss

Agencies typically charge a fee that is a percentage of the annual salary of the hired candidate, ranging from 15% to 33%. Generally, 15% fees are typically for roles that are easier to fill for agencies, and 33% tends to be more for executive search, where the right candidates are in short supply. We will see if it’s worth it.

HR staff salaries – Are you paying them enough?

This includes the time spent on activities such as screening resumes, conducting interviews, and negotiating offers.

Hiring Manager – The future boss of the candidate

The hours they need to spend in supporting to elaborate the brief, look at the CVs and participate in the interview are hours removed from the main tasks of their role.

Candidate travel

For roles that require in-person interviews, especially if executive roles, your company normally covers travel expenses for candidates.

Onboarding and training

These costs include the time and resources needed to integrate the new employee into the company and provide the necessary training for their role.

Recruitment days and events

Finding and attracting new talents it’s easier in events like university recruitment days or career fairs – but they ain’t cheap.

Administrative & technological expenses

Drafting contracts in compliance with current regulations, following all the administrative aspects of recruiting and onboarding processes, updating company databases: all of this has a cost. As well as an increasingly higher cost is that of the set of advanced software – which often uses AI – for the selection and management of human resources.

Employee branding & referral program

If your company invests in employee branding – if it doesn’t it should, given the latest LinkedIn research¹ – and has a paid referral program for new talent, then this is also a cost to consider. Spoiler: it’s often higher than what companies quantify (but the ROI is great!).

Opportunity costs

Opportunity costs refer to the potential loss of productivity or revenue due to unfilled positions.The longer a position remains vacant, the higher the opportunity cost, which can indirectly increase the overall recruitment cost.

Calculating recruitment cost per hire is essential, but it’s not alway enough to evaluate the efficiency of the hiring process. That’s because, given the factors we discussed and the formula you can see here, not every position has the same value for the company – nor should they have the same costs! An executive search is way more costly than an intern search.

Two searches for executive roles in the year can lead to a significant increase in the total recruiting cost, without this fully reflecting the complex reality of costs.

This metric provides a clear view of the average cost for each new employee hired as long as the positions have a similar value range to the company. A CEO search should for sure be excluded for a more precise analysis!

However, this metric is crucial when budgeting for HR based on how many and what kind of employee you need to hire.

Another metric that can give you a good insight on the efficiency of your recruiting processes is the recruitment cost ratio. RCR which relates the recruitment cost to the total compensation of new hires (%), thus providing a better analysis on the added value of recruiting.

Among all the recruiting expenses, those referring to agency fees are often felt as the highest. The fact is, this perception isn’t real when you take hidden costs into consideration.

Recruitment agencies – like us – can streamline the hiring process and provide access to a broader talent pool and perfect fit candidates, reducing the time needed to fill the open positions. When discussing agency fees we should divide between permanent and temporary search.

For permanent search agency fees can range from 15% to 33% of the candidate’s annual salary. This is usually paid in full at the end of the selection process, when the research is contingency based. In permanent research the company can also choose to assign to the agency a retainer research that is paid in front and can be splitted into initial research, shortlisting and placement fees.

For temporary roles the model is different. Here the fee is included as a % of the hourly bill rate for the hired candidate: the longer the employee is kept in the company, the longer the agency will receive their fee. Furthermore, a fee is usually applicable even if the candidate is hired on a permanent basis. The reason is that if the new hire is kept in the company longer than expected or gets a permanent role it means that the quality of the candidate offered by the agency was high.

All these fees seem a high cost for the company – and they are.

But when evaluating the real cost of a recruitment agency companies should consider factors such as the urgency of the hiring need, the difficulty of finding qualified candidates, and the internal capacity to manage the recruiting process.

The longer it takes to fill a vacancy, the higher is the cost the company is paying. 

That’s not only due to the time spent on the hiring process by the internal HR department but also to the opportunity cost.

The opportunity cost refers to the potential loss of productivity, revenue, or other benefits that an organization incurs when a position remains unfilled for a period of time.

This cost arises from the delay in filling the role, which can lead to missed opportunities for the company to achieve its objectives, meet deadlines, or capitalize on business prospects.

The last not-so-hidden cost is the cost of a bad hiring which according to a 2023 US cross-industry survey is nearly $17,000 on average² on top of the recruitment cost. This figure includes direct financial costs like termination expenses, productivity decrease, efficiency deficit and long-term strategic issues.

The hidden costs are higher the more relevant and specialized the position is. For this reason, especially in sectors where searches are often aimed at highly specialized personnel, turning to a recruiting agency is an excellent choice to:

• reduce the time needed for the recruiting process

• access a database of selected and engaged candidates

• have a larger talent pool available

• guarantee a fast time reaction speed

• ensure a technical language-fit between your recruiter and candidates 

Choosing an agency – like us – can surprisingly be an option to reduce the overall cost of hiring. Let’s see the other options to achieve a cost reduction.

Here the challenge is reducing recruitment costs without compromising candidate quality. Several strategies can help achieve this goal:

Optimize the internal recruiting process

Investing in recruiting technologies, such as applicant tracking systems (ATS), can enhance the efficiency of the hiring process. These tools help manage applications, streamline communication, and reduce the time spent on administrative tasks.

Leverage internal hiring

Promoting career opportunities internally can significantly reduce recruitment costs. Current employees already understand the company culture and can quickly adapt to new roles, reducing training time and costs.

Implement referral programs

Referral programs encourage employees to recommend qualified candidates in exchange for rewards. This approach can reduce advertising and agency costs while improving candidate quality.

Collaborate with Universities and professional schools

Establishing partnerships with educational institutions can provide a steady flow of qualified candidates and reduce recruitment costs. Internships and apprenticeship programs can also be a great way to assess potential employees before offering them full-time positions.

Streamline the selection process

Efficient selection processes, such as standardized interview questions and skills assessments, can reduce the time and resources spent on evaluating candidates. This not only speeds up the hiring process but also ensures a more consistent and objective assessment of candidates.

Analyzing historical data

Reviewing historical data on recruitment costs can help identify patterns and areas for improvement. Analyzing past hiring cycles can provide insights into which strategies were most cost-effective and where expenses can be reduced.

Benchmarking against industry standards

Comparing recruitment costs with industry benchmarks can provide a reference point for evaluating the efficiency of the hiring process. This comparison can highlight areas where the company is overspending and identify opportunities for cost savings.

Continuous improvement and feedback

Implementing a continuous improvement approach to recruitment can help identify and address inefficiencies. Gathering feedback from new hires and hiring managers about the recruitment process can provide valuable insights for refining strategies and reducing costs.

Recruiting is an essential yet costly process for any organization. Understanding what comprises recruitment cost and how to calculate it is crucial for effectively managing company resources. Using metrics such as cost per hire and recruitment cost ratio helps monitor the efficiency of the hiring process.

Additionally, implementing strategies to reduce recruitment costs can lead to significant savings without compromising the quality of new hires.

Or you can simply choose a great agency like headcount.