Recruiting Cost Ratio
Perhaps one of the oldest and most frequently used metric to measure staffing efficiency is cost-per-hire. The standard cost-per-hire is the ratio of recruiting costs to hires, using number of hires as a measure of productivity. Simply put, a lower cost-per-hire implies a more efficient or productive operation, since more hires are obtained at a lower cost. Although widely used by many staffing organizations, cost-per-hire is not an accurate metric and therefore, organizations should not measure it. Before Staffing.org’s 2000 Staffing Performance Survey, this standard had been largely unquestioned. Since then however, more and more companies have taken a harder look at cost-per-hire. Listed below are some of the inherent problems with this metric.
Geographic differences. Recruiting costs vary from one region to another. This is evident from the variances in labor markets, cost of living, and cost of services. A $4,000 per hire figure in Connecticut may reflect a highly efficient operation, while a similar figure in South Carolina may reflect a costly hiring process. Therefore the cost-per-hire metric reveals little when comparing one region to another.
Industry differences. Experience tells us that some industries (such as high technology) have more difficulty attracting candidates. Therefore, variations in cost-per-hire from one organization to the next reveal nothing about the efficiencies of their respective staffing operations. An organization in an industry that historically has difficulty attracting candidates may have a cost-per-hire figure that’s twice as high as an organization in another industry, but may in fact have a more efficient staffing operation. The cost-per-hire measure simply does not, by definition, account for variations in hiring difficulty by industry.
Functional differences. Just as a cost-per-hire measure does not account for variations in industries, it also fails to account for variations in the types of positions being filled. For example, it is easier and less costly to find an HR generalist than a patent attorney. Because of this difference, comparing on a cost-per-hire basis for these two fields can be very misleading. The cost-per-hire metric does not help organizations that hire into a variety of fields understand the value or effectiveness of their staffing operations. Many, if not all organizations face this dilemma.
Differences in job levels. Compensation, of course, varies by level in each organization. As with the other differences, measuring on a cost-per-hire basis does not allow comparisons between different positions at different levels.
As such, the traditional cost-per-hire metric does not help organizations understand the value or effectiveness of their staffing operation. Recruiting Cost Ratio however, addresses these concerns. Recruiting Cost Ratio is superior to the traditional cost-per-hire metric when analyzing performance. RCR is an incredibly accurate and useful tool for budgeting and recruiting resource allocation.
To demonstrate how the RCR can be used to identify meaningful differences that a traditional cost-per-metric would miss, Table 8.1, taken from the 2005–2006 Recruiting Metrics and Performance Benchmark Report, uses a hypothetical example to compare both measures. Notice that although a higher cost-per-hire is observed for hiring radiologists compared to accountants, the staffing function is actually less costly in hiring radiologists since a lower RCR denotes fewer dollars spent for the function.
| Type of Position | Total Staffing Costs | Total Compensation Recruited | Traditional Cost-per-Hire | Recruiting Cost Ratio (RCR) | |
|---|---|---|---|---|---|
| Positions Filled | Average Compensation | ||||
| Accountant | $ 60,000 | 10 | $40,000 | $6,000 | 15% |
| Engineer | $600,000 | 100 | $60,000 | $6,000 | 10% |
| Radiologist (Macon, GA) | $ 56,000 | 8 | $70,000 | $7,000 | 10% |
| Radiologist (New York, NY) | $140,000 | 20 | $100,000 | $7,000 | 7% |
Organizations that use RCR, as opposed to the alternative cost-per-hire, will be left with a much more accurate portrayal of how efficient their recruiting operations are. The RCR is used to determine average HR spending on recruiting activities in relation to the starting compensation of new hires (positions filled) that result from staffing activities. To calculate RCR, follow these steps:
1. | Determine Total Staffing Costs. Total Staffing Costs for a given period of time (usually one year) include all expenses associated with recruiting and hiring and are divided into four categories. Perhaps as important as the classifications themselves is the process of calculating each area separately as a percentage of compensation recruited. This promotes more accurate analysis of staffing operations and allows organizations that do not incur expenses in all categories to compare their performance to organizations that do incur expenses in all categories. Total Staffing Costs is the sum of the following expenses:
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2. | Determine the Total Compensation Recruited (TCR). This is the sum of the base salaries for external hires during their first year. Part-time employees working on an hourly basis should be included in this number. To process TCR for part-timers, simply multiply their starting hourly wage by the number of hours they were expected to work over the first year. |
3. | Calculate the Recruiting Cost Ratio. RCR = TCR/Total Staffing Costs. When multiplied by 100, the result yields a percentage. The percentage indicates how many recruiting dollars an organization spends for every dollar in new hire compensation. |