How to Calculate the ROI of Hiring Better People
April 6, 2016
Are the people you’re attracting and hiring representative of the best people in the field?
If your answer to this question is “no,” then increasing your hiring efficiency should hardly be a priority for you. Instead, your top concern should be figuring out how to hire the best people in the field.
Ultimately, hiring the best is worth accolades from the CEO and every hiring manager who works with these stronger people. To pull this off, you need to show leadership, confidence and a strong business case for the ROI of hiring top performers. One simple way to build a case is to calculate the variable profit contribution of each new hire and see how this compares with any extra money you need to invest in finding these prospects. If the ROI is big enough, getting executive-level buy-in is all but assured.
Doing the math
To develop a rough estimate of this at your company, multiply revenue per employee (see your company’s SEC reports for this) by 40%. Your CFO will agree this is a reasonable estimate of incremental profit margin per new hire.
For example, I like to use $600 thousand as revenue per employee (FYI, GE is around $400 thousand and Microsoft is around $770 thousand). At 40%, the variable profit contribution for each new employee is $240 thousand. Assuming a normal distribution of employees, those in the top 25% on average contribute at least 25% more in variable profit or $300 thousand per year. (I’ve created an ROI calculator which allows you to adjust this by average compensation per employee and your own company’s actual financial data.)
If a recruiter is now making 30 placements per year, the total variable profit contribution of these people is $7.2 million per year. This increases to $9 million per year for hiring 30 people in the upper 25% – a profit improvement of $1.8 million per year. Since the investment required to obtain this improvement is one-time and the improvement is annual, it’s pretty easy to conclude the ROI is well over 1000%.
A 6-step strategy for hiring top performers
Of course, hiring people in the top 25% is the bigger challenge, but at my search firm we proved this could be done at hundreds of different companies. After 20 years and 1,500 placements later we had a fallout rate (total quits and fires) of less than five percent in the candidate’s first year. Even better, over 50% of these people got promoted within two years.
The process used to achieve this eventually became the Performance-based Hiring process I advocate and the one Professor Todd Rose at Harvard considers “the sweet spot for hiring top talent.” It’s summarized below. (A version of this program is now available on Lynda.com).
Here's what we do to hire the best:
1. Ban job descriptions listing skills, experiences and competencies.
We tell our clients the top 25% in any job field got more done with less or a different mix of skills and experiences so it would be counterproductive to exclude these people.
2. Define the job as a series of 6-8 challenging performance objectives.
To replace traditional job descriptions, we ask our clients what the person in the role has to accomplish in order to be in the top 25% of his or her peer group.
3. Advertise the unique employee value proposition as the primary means to attract people.
We ask the hiring manager to define why a top person who isn't looking would want the job. This is combined with the job’s bigger purpose, like tying it to the company’s strategy or big project, to create the employee value proposition.
4. Implement a 40/40/20 sourcing plan.
To reach the entire active and passive talent market, a three-pronged approach is used. Twenty percent involves preparing visible and very compelling creative advertising. Forty percent of the effort involves a series of email and voice mail campaigns designed to engage and network with candidates we identify as a high-potential prospects using tools like LinkedIn. The final 40% involves proactively obtaining referrals of high quality passive candidates using aggressive networking.
5. Conduct a rigorous performance-based interviewing and assessment process.
The essence of this involves digging deep into the candidate’s major accomplishments, comparing these to actual job needs and conducting formal group debriefing sessions to measure pre-hire quality of hire.
6. Close the deal by providing the candidate a 30% non-monetary increase.
People in the top 25% in any field are not interested in ill-defined lateral transfers. However, using the consultative recruiting process described above we are able to demonstrate that the new job offeres a combination of a bigger job, faster growth, more impact and more satisfaction. When collectively this is greater than 30%, it is relatively easy to close these candidates without compensation being the primary motivator for accepting an offer.
While improving quality of hire by 25% is not easy, it’s not impossible. It starts by demonstrating the business and ROI financial impact of improving quality of hire by 25%. Based on this you then need to reengineer your recruiting process based on how top 25% people are identified, attracted, assessed and hired. Most important, over the past 25 years not one company in the world has ever achieved this goal by being more efficient. They got there by being different.
*Image by Simon Hayhurst