How to Count Average Cost per Hire in Tech

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Understanding the average cost per hire is crucial for companies that want to have full control over their hiring process and optimize their recruiting expenses. This strategic metric influences not only financial planning but also recruitment strategies, playing a key role in a company’s success.

This article offers a clear guide on calculating these costs, analyzing their components, and providing actionable strategies to enhance recruitment efficiency. Discover how to navigate the complexities of hiring costs in tech, making informed decisions that support your company’s growth and innovation goals.

Table of Content

Why Do You Need to Count Cost per Hire?

Cost per hire is a crucial HR metric that quantifies the total expenses involved in recruiting a new employee, encompassing both internal and external costs. In the tech sector, understanding this metric is vital due to the high demand for specialized skills and the competitive market for top talent. Calculating the cost per hire not only helps in assessing the efficiency of a company’s recruitment process but also in making informed strategic decisions.

The Impact of Hiring Costs on Budgeting and Financial Planning

The cost of filling a position, especially its a senior or lead one, can be substantial. These costs include advertising job openings, recruiting agency fees, employee referral bonuses, interviewing expenses, and onboarding costs, among others. High hiring costs can strain budgets, especially for startups and small to medium-sized tech companies. By understanding and optimizing the cost per hire, companies can better allocate their resources, plan financially, and invest in growth opportunities more wisely. Effective budgeting for recruitment ensures that a company can continue to attract and retain the talent necessary for its success without compromising its financial health.

Comparing Technology Sector Hiring Costs with Other Industries

The tech sector often faces unique challenges in recruitment, contributing to higher hiring costs compared to many other industries. The demand for tech talent outstrips supply, leading to competitive salary offers and benefits to attract skilled professionals. Additionally, the rapid pace of technological advancement requires candidates who are not only skilled in current technologies but also capable of learning and adapting quickly. This contrasts with industries where the skill sets may be more static, and the talent pool is larger. The tech sector’s emphasis on innovation further escalates hiring costs, as companies invest in acquiring talent that can drive future growth. Understanding these industry-specific factors is crucial for tech companies to benchmark their hiring costs effectively and to devise strategies that balance financial efficiency with the acquisition of high-quality talent.

Components of Cost Per Hire

The recruitment costs are typically divided into internal and external categories, each comprising various expenses incurred during the hiring process. By dissecting these costs, technology companies can identify areas for improvement and potentially reduce expenses without compromising the quality of their hires.

Internal Costs

Internal recruiting costs refer to the expenses associated with the company’s resources and activities related to the hiring process. Key internal costs include:

  • HR Salaries: The wages paid to HR professionals and any other staff involved in the recruitment process.
  • Referral Bonuses: Incentives offered to current employees for referring successful new hires, which can significantly enhance the quality of applicants at a relatively low cost.
  • In-house Recruitment Technology: Investments in applicant tracking systems (ATS), recruitment software, and other technologies designed to streamline the hiring process.
  • Training for Recruitment Teams: Costs associated with training HR teams on best practices for efficient and effective hiring.
  • Interview Expenses: Resources used during the interview process, including the cost of interviewers’ time and any tools or technologies used for assessment.

External Costs

External recruiting costs are expenses related to services or resources outside the company used in the recruitment process, such as:

  • Job Postings: Fees for advertising vacancies on job boards, social media platforms, or industry-specific websites.
  • Recruitment Agency Fees: Costs paid to agencies for finding and vetting candidates, typically a percentage of the hired candidate’s first-year salary.
  • Candidate Travel Expenses: For roles requiring relocation or in-person interviews, companies might cover travel and accommodation costs for candidates.
  • Background Checks and Pre-employment Screening: Fees for conducting background checks, drug tests, and other screening processes to ensure the suitability of candidates.

The costs associated with hiring can vary significantly within the technology sector, influenced by factors such as the role’s complexity, the scarcity of the required skills, and the company’s size and reputation. For instance, filling a highly specialized position or hiring in a competitive market like Silicon Valley may incur higher costs than recruiting for a more common role in a less competitive area. e.g., offshore countries like Mexico or Poland. Additionally, startups and smaller tech companies might spend proportionally more on certain expenses, like recruitment technology or agency fees, as they strive to attract talent in a market dominated by established players.

How to Calculate Cost Per Hire

So how can you calculate the average cost per hire? Let us figure out it together.

Step-by-Step Guide on Calculating Average Cost Per Hire

  1. Identify All Hiring Costs: Start by listing all internal and external costs associated with the recruitment process, as outlined in the previous section. This includes everything from HR salaries and job postings to recruitment agency fees and candidate expenses.
  2. Sum Total Costs: Add up all the costs identified in step one to get the total hiring expenditure for a specific period, such as a quarter or a fiscal year.
  3. Count the Number of Hires: Determine the total number of hires made during the same period you calculated the costs for.
  4. Calculate the Average Cost Per Hire: Divide the total hiring expenditure by the number of hires to find the average cost per hire.

Here is a cost-per-hire formula you need to use:

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Example Calculation

Let’s assume a technology company incurred the following costs over one year:

  • Internal Costs: $100,000 (including HR salaries, referral bonuses, in-house recruitment technology)
  • External Costs: $50,000 (including job postings, agency fees, candidate travel expenses)

Total Hiring Costs = $150,000

Number of Hires = 30

Average Cost Per Hire = 150,000/30 = $5,000

Thus, the average cost per hire for this company is $5,000.

Tools and Resources for Tracking Hiring Expenses

Several tools and resources can aid technology companies in tracking and analyzing their recruitment expenses:

  • Applicant Tracking Systems (ATS): Many ATS solutions offer financial tracking features, allowing companies to monitor the costs associated with each vacancy and hire.
  • Human Resource Management Software: Comprehensive HR platforms often include modules for budgeting and expense tracking, which can be used to manage recruitment costs.
  • Spreadsheets: For smaller companies or those with a limited recruiting budget, a well-organized spreadsheet can be an effective tool for tracking hiring expenses.
  • Financial Management Software: Software that offers detailed budgeting and expense tracking can be adapted to monitor recruitment costs, providing insights into how these expenses fit into the company’s overall financial picture.

By meticulously calculating and analyzing the average cost per hire, technology companies can better understand the financial dynamics of their recruiting process, enabling them to make strategic decisions that balance cost efficiency with the acquisition of top talent.

Strategies for Optimizing Hiring Costs

Optimizing hiring costs is essential for technology companies to remain competitive, financially healthy, and capable of attracting top talent without overspending. Here are three strategies to achieve cost-effective recruitment:

1. Increasing Retention of Current Employees

One of the most effective strategies for reducing hiring costs is to focus on retaining current employees. High employee turnover not only leads to direct costs associated with recruiting replacements but also affects company morale and productivity. Implementing a robust retention program can significantly cut churn, saving money and resources in the long run.

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TurnKey’s Retention Program

TurnKey has transformed employee retention into a precise science, cutting churn by more than 50% through its innovative program. This process involves:

  • Monthly Assessments: TurnKey’s talent retention experts evaluate each developer based on key retention factors.
  • Talent Retention Index Score: A proprietary algorithm calculates a score for each developer, indicating their churn risk. This score helps in identifying developers who are happy and those at medium to high risk of leaving.
  • Customized Retention Programs: Based on the risk levels, tailored retention programs are implemented to maintain the satisfaction of content developers and improve the retention score of those at risk.
  • Regular Communication: Clients receive ongoing updates about their team’s retention risk and the measures being adopted to mitigate it.

This approach not only reduces turnover but also fosters a positive work environment that encourages developers to stay longer with the company.

2. Leveraging Technology and Social Media for Recruitment

Utilizing technology and social media platforms can streamline the recruitment process and reduce costs. ATS (Applicant Tracking Systems) can automate the screening and initial evaluation of candidates, saving time and resources. Social media platforms, when used effectively, can attract high-quality candidates at a lower cost than traditional job advertisements or recruitment agencies.

3. Implementing Employee Referral Programs

Employee referral programs can be a cost-effective way to recruit new talent. Employees who refer candidates are often incentivized with bonuses, but the overall cost is typically lower than using recruitment agencies or extensive job advertising. Moreover, referred employees often have a shorter onboarding time and higher retention rates, further optimizing hiring costs.

By adopting these strategies, technology companies can optimize their hiring expenses, focusing on retention, leveraging modern recruitment technologies, and encouraging employee referrals. These approaches not only reduce costs but also enhance the quality of hires and contribute to a positive company culture.

Summing Up

Managing hiring costs effectively in tech is not just about reducing expenses — it’s about strategic investment in the company’s future. Through the careful calculation of average cost per hire, benchmarking against industry standards, and the implementation of cost-optimization strategies, technology companies can ensure they are not only attracting but also retaining top talent in a competitive landscape.

The emphasis on increasing employee retention, particularly through innovative programs like TurnKey’s, highlights a shift towards recognizing the value of a stable, satisfied workforce. By leveraging technology for efficient recruitment and fostering a culture that encourages employee referrals, companies can further streamline their hiring processes and reduce costs.

Ultimately, the goal is to achieve a balance between cost efficiency and the acquisition of high-quality talent necessary for innovation and growth. As the technology sector continues to evolve, so too will the strategies for optimizing hiring costs. By staying informed and adaptable, companies can navigate these challenges successfully, ensuring their position at the forefront of technological advancement.

FAQ

How can technology companies calculate the cost per hire accurately?

To calculate the cost per hire accurately, companies should start by identifying all associated costs, both internal and external. This includes internal costs like HR salaries, referral bonuses, and in-house recruitment technology, as well as external costs such as job postings, recruitment agency fees, and candidate travel expenses. Once these costs are identified, sum them up and divide by the total number of hires made within a specific period. Utilizing tools like Applicant Tracking Systems (ATS) can also automate and streamline the tracking of these expenses for more accurate calculations.

Why is benchmarking hiring costs against industry standards important?

Benchmarking hiring costs against industry standards is crucial for several reasons. It helps companies understand how their spending compares to peers and competitors within the tech sector, highlighting areas where they may be overspending or underinvesting. This insight allows companies to adjust their recruitment strategies to improve efficiency and cost-effectiveness. Moreover, benchmarking can reveal industry trends and shifts in hiring practices, enabling companies to stay competitive and adapt to the evolving market.

How does increasing employee retention help reduce hiring costs?

Increasing employee retention plays a significant role in reducing hiring costs for several reasons. First, it directly decreases the need to spend on recruiting and training new employees, which can be a significant expenditure. Secondly, high retention rates contribute to a more stable and experienced workforce, enhancing productivity and reducing the indirect costs associated with turnovers, such as lost knowledge and decreased morale. Programs like TurnKey's retention initiative, which significantly cuts churn by assessing and addressing employee satisfaction and engagement, exemplify how targeted retention efforts can lead to substantial cost savings and a more cohesive team.

March 21, 2024

TurnKey Staffing provides information for general guidance only and does not offer legal, tax, or accounting advice. We encourage you to consult with professional advisors before making any decision or taking any action that may affect your business or legal rights.

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