EMA model defines cost-per-hire as part of staffing performance - Employment Management Association

In today's tight labor market, assessing cost-per-hire is increasingly important for HR professionals. Whether a company uses traditional or new methods, having an effective way to calculate cost-per-hire is essential to both proving the value of HR and making HR operations as efficient as possible.

Unfortunately, many companies are tracking source costs - such as advertising, search firms or employment agencies - rather than cost-per-hire, says Gary Luff, president of Luff & Associates in Restor, Va. "Many HR departments don't have the resources-that is, the hands and feet - to collect the necessary data. Most companies can track their direct fees but the other costs are 'too difficult to collect,' so they don't bother," explains Cluff, who created the original cost-per-hire survey for the Employment Management Association (EMA), which became a professional emphasis group of SHRM in 1996.

EPA has been tracking cost-per-hire for more than 12 years. EMA's 1994 report - the latest for which statistics have been compiled-found that overall, cost-per-hire rose by 3.2 percent over 1993, to $3,310 in 1994, while the exempt cost-per-hire fell 2.2 percent, to $6,359. EMA has a fax-back survey in progress for 19961997 cost-per-hire statistics and is conducting a full-year survey for 1997.

Hiring costs represent a significant portion of HR expenditures, particularly when the effects of turnover are considered, according to SHRM's 1997 Survey of Human Resource Trends. The survey also found that "... hiring costs for managerial and executive positions are substantially greater than those for positions at lower levels [and] a wide range of costs is evident." Yet many HR professionals overlook those aspects of the hiring process - to their detriment.

Cluff considers assessing cost-per-hire ital, even though doing so is difficult. "Only a relatively small percentage of HR professionals recognize the importance of metrics to prove their value to their companies," he says.

To help HR demonstrate its value, "we need a better common indicator of the productivity of the recruiting effort," says Nick C. Burkholder, SPHR, vice-president for HR at the Reliance Insurance Companies, Philadelphia, Pa. Going beyond the existing formulas, he has developed a new model that puts cost-per-hire into the total context of numerically assessing the effectiveness of the staffing function.

TWO KEY METHODS FOR FIGURING COSTS

There are two classic methods for computing cost-per-hire: the EMA model, which Cluff developed in 1983, and the Saratoga Institute's HR Effectiveness Report, which has been around for about 10 years.

A good cost-for-hire assessment should include, internal, external and direct costs, according to Cluff. The EMA model takes all of those costs into account. They include

* Internal costs-employment/ recruiting office salaries and benefits; staff travel, lodging and entertainment; and administration.

* External costs-travel, lodging and entertainment, and salaries for other recruiters.

* Company visit expenses - candidate travel, lodging and meals; interview workday expenses, and others.

* Direct fees - advertising, job fairs, agency and executive search fees, cash awards for employee referrals, and college recruiting.

* Supplemental data - average annual salary of new hires, recruit workload, and number of interviews versus number of hires; acceptance rate, time-to-fill; time-to-start, turnover, relocation costs and average sign-on bonus.

The primary difference between the Saratoga and the EMA model, Cluff says, is that "the Saratoga method gives 'other recruiter costs' and 'administrative expenses' a flat 10-percent weight, rather than giving them a line item for actual costs. The numbers tend to be within 5 percent of each other."

Minor problems have been found in the two current cost-per-hire methods. The Saratoga method, for instance, doesn't take actual costs for other recruiters and administrative expenses into account, so its results may not be specific enough to satisfy some financial observers.

When the EMA method of figuring cost-per-hire was the only model available, it was difficult to obtain externally comparable data to assess, Cluff notes. And past models tended not to separate the dramatically different costs of filling executive positions and lower-level ones, he adds.

Because gathering all the data needed for a complete picture of cost-per-hire is difficult and time consuming, it often does not get done. CFOs and CEOs may have to demand such information for it to become a standard part of the process.

NEW OPTIONS

Respondents to SHRM's 1997 HR trends survey say that finding candidates was their single greatest employment challenge, followed by retaining those hired and selecting the best qualified. The tight labor market is pushing HR toward new ways of defining and figuring cost-per-hire as new ways of finding candidates emerge. "Other models are surfacing as companies seek metrics that are more relevant than comparing 'apples to oranges,'" Cluff explains. "Organizations are getting more sophisticated and see ways to measure with meaning for operational management - for the CFO - and contribute to the bottom line."

One of those new methods was introduced at the SHRM annual conference this year. The Metrics-Driven Staffing Model, developed by Burkholder, is based on several years of research by EMA members to determine the parts of the hiring process that best indicate success.

"When I started out as a recruiter, my boss said all he cared about was cost-per-hire," recalls Burkholder, one of the few people in staffing who has filled jobs in more than four dozen countries. Then, "the definition of cost-per-hire was a dollar limit, with all jobs filled by a certain date, no complaints from customers and quality of candidates based on whether they made it to their first paycheck!"

Today, Burkholder says, a cost-per-hire calculation needs to put quality of the hire first, followed by customer satisfaction, time invested and then cost. "Cost is only one factor. You have to include and weigh the time it takes to fill the position, quality of the hire and customer satisfaction. Doing so levels the process."

His Metrics-Driven Staffing Model, which provides recruiters with the first common language for quantifying the hiring process, can be used to evaluate staffing performance as well as figure cost-per-hire. It breaks down costs by geography, level and type of hire, among other elements, to make the data more meaningful. "Cost-per-hire can't be compared for different levels of jobs," he notes. "It can't be the same for an executive versus a clerk and, even with the same level of jobs, costs can differ. It may cost $10,000 to fill a New York City marketing job but only $6,000 to fill the same job in Albuquerque, which makes it look as if New Mexico did better."

The model is based on a closed-loop recruiting process that uses continuous strategies to attract, select, absorb, evaluate, adjust and retain valuable candidates for jobs. It uses training, interviews and questionnaires at various points in the continuum, with an orientation to results and the goal of a satisfied end-user or customer. "The process was borrowed from the manufacturing industry," Burkholder says. "It looks at staffing as a [continuous] process, rather than a [one-time] task."

Cost is based on the ratio of recruiting expenses incurred to adjusted compensation of the position being recruited for, called Adjusted Compensation Recruited (ACR). "This is more accurate than traditional measures, because it considers variables that affect the total cost of filling a particular job," he says. ACR takes several factors into account and correlates compensation and candidate supply and demand, yielding a more realistic cost ratio.

Filling jobs internally is often easier, and the metrics method takes that fact into account, Burkholder notes. "It's important to include internal and external costs, which could reduce the inclination to always go outside to fill positions. The denominator we use is 100 percent of external compensation for recruiters and 25 percent f the internal salaries."

The metrics-driven model, which has been recommended by the SHRM board for use by all organizations, may make cost-per-hire assessments more widespread and valuable. "The metrics have been reviewed by financial people, so this model has credibility," Burkholder says.

Developing good numbers to accurately assess cost-per-hire should benefit any HR department, he explains. "Good metrics will help reduce costs because, if you have a good benchmark, people will aim for it."

For more information on the metrics-driven model, contact Nick Burkholder at (215) 864-4000, ext. 4840. Also, see "How Internet Affects Hiring Costs" on the HRMagazine section of SHRM's Home Page on the World Wide Web (http://www. shrm.org).

Ruth E. Thaler-Carter is a freelance writer-editor based in Baltimore, Md. She has worked on newsletters for the SHRM diversity initiative and Institute for International HR, and has contributed articles to HR News and the 40th anniversary issue of HRMagazine. Her e-mail address is rthalerc@aol.com.

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