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Staffing Metrics - Recruiting Cost Ratio (RCR)

The Recruiting Cost Ratio (RCR) is a simple, straightforward calculation that:

•    Is based on compensation recruited by a recruiter or staffing function
•    Is the primary factor used to determine external fees
•    Takes into account that in most cases, the higher the pay, the more costly it is to fill the position.
•    Reflects the correlation between compensation and candidate supply and demand.
•    Allows for an assessment of staffing efficiency for a broad mix of positions.
•    Allows for a mix of positions filled.
•    Ideal budgeting factor

Just as the value of real estate sold is a much more accurate measure of a real estate firm's productivity, “compensation recruited”, the base starting salary of new hires, is the most accurate and the best measure of staffing productivity.
To maximize the accuracy of the staffing cost, it is important that the cost components be clearly defined. Broadly, any expense incurred to foster the recruitment of external candidates is considered a recruiting cost.

Recruiting costs should be broken down as follows:
• Internal Recruiting - overhead recruiting operating expenses
• External Recruiting - advertising, recruiting fees, Internet postings
• Signing bonuses
• Travel, relocation, and visa expenses

These terms are defined below:

Internal Recruiting Costs - These are your fixed or “overhead" expenses comprising everything from recruiter compensation and benefits to office and technology expenses. These costs are an obvious classification. These operating expenses are defined as virtually all costs required to maintain a staffing operation.

External Recruiting Costs - These expenses are also referred to as sourcing costs and include advertising, agency and search fees as well as the costs associated with Internet postings. External recruiting costs include virtually all, primarily external expenses involved in identifying and recruiting candidates. Sourcing costs are usually incurred for a specific position or positions, but they can also include general initiatives such as employer branding.

New Hire Signing Bonuses - The issue of new hire signing bonuses has prompted considerable debate. The IRS considers signing bonuses to be compensation, so why should extra money paid to the new hire be considered a recruiting cost?

Ultimately, our financial analysts determined that new hire bonuses should be considered staffing expenses because it was extra money paid to induce a candidate to fill a position. It is irrelevant who the money is paid to—contingency fees, recruiter bonuses (both sourcing expenses) and new hire signing bonuses-are all recruiting expenses.

It is clear that some organizations are skillfully reducing their other recruiting expenses by offering significant new hire signing bonuses. While this may well be a sound business decision, it supports the conclusion that new hire signing bonuses are in fact recruiting expenses.

Travel, Relocation and Visa - This category includes relocation, travel, and visa expenses. These flexible costs, while directly associated with recruiting, have often been missed in evaluating staffing efficiency.
Perhaps as important as the different categories 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 companies that do not incur expenses in all categories to compare their performance to organizations which do earn expenses in all categories.

The sum of these four cost areas yields total staffing costs.

Next, you must determine the sum of the base annual starting compensation of all external positions filled by staffing operations. For seasonal and part-time hires, this should be the total compensation they would be expected to earn in one year. This figure is your total compensation recruited.

The RCR is used to determine average HR spending on recruiting activities in relatin to the starting compenstation of new hires (positions filled) that result from staffing activities. The calculation for the metric is below:

Recruiting Costs/Total Compensation Recruited x 100 = RCR

When multiplied by 100, the result yields a percentage. A lower percentage figure indicates a more efficient recruiting function.

In the past, we calculated this ratio as the Recruiting Efficiency Ratio (RER). RER is simply a new term. The principle of RER remains the same. Experts decided that a new way to present efficiency was needed in order to clarify its meaning as not to confuse the (RCR) with efficiency (see Efficiency).  The result was that a new term was needed to describe the RER. From this work, the Recruiting Cost Ratio was created.

The Recruiting Cost Ratio addresses all of the difficulties inherent in the Cost-Per-Hire metric. This metric reflects the correlation in compensation with variations in market, level, industry and geography (i.e. more difficult markets will require higher compensation to secure a candidate). The same is true for the other factors. A tight labor market drives compensation up, and vice versa; unattractive industries must pay more to get the people they want, while organizations in popular locations benefit from larger labor pools.

**Portions of information on this page may have been derived from the HRMetrics Certification Program which was originally developed by Staffing.org. Copyright © 2006, Staffing.org, Inc., All Rights Reserved

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Copyright © 2006, HRMetrics, Inc., All Rights Reserved