Consider Hiring an Investment, Not an Expense
It seems the only companies successful at attracting great people on a consistent basis are those with the big brass employer brands. For everyone else, even those using ZipRecruiter or Indeed, it’s hard to hire stronger people when the focus is on the speed and cost of hiring rather than the impact those being hired can make. Focusing on the ROI of every hiring decision is a great way to rethink hiring as an investment and one that needs to be justified in the same way.
A few years ago, we created this ROI of Hiring the A-Team Calculator. By multiplying a company’s revenue per employee by its variable profit margin, it’s relatively easy to calculate the profit contribution of each employee. For example, for a company with a revenue per employee of $500 thousand and a variable profit margin of 40%, each employee on average contributes $200 thousand in profit. The calculator adjusts this for salary, but the big idea is that when using simple statistics, on average, the top 25% contributes $100 thousand more per year. Every year!
The one-time cost in time, money and effort to hire a talented person is insignificant in comparison to the impact these better hires can make. Yet despite the obvious, most business and talent leaders focus too much on filling positions faster rather than on making the investment needed to improve quality of hire.
Here’s my take on why this bottleneck has not been broken.
Why Companies Can’t Get Out of the Hiring Box They’re In
It’s too disruptive. Starting over seems to be hard work. The graphic shown was put together 20 years ago based on the then state of affairs. Not much has changed but this simple course on how to hire stronger talent is an easy way to make the paradigm shift.
The strategy is wrong. This is a root cause issue. Simply stated, you can’t use a surplus of talent strategy in a scarcity of talent world. Too many companies still believe they can post boring job descriptions and attract world-class talent with a new ATS and by implementing a great candidate experience.
Talent is considered an expense, not an investment. Cost per hire is not a strategic metric. The total cost of hiring is what matters. For example, consider that 100 hires at $100 thousand each in terms of compensation is $10 million in salary costs, $50 million in average revenue and $20 million in pre-tax profit (all S&P 500 averages). This is a lot of money that should be considered a capital investment and justified the same way – on an ROI basis.
Hiring managers aren’t capable of hiring the A-Team. I’m not sure if only A-level managers can hire A-level people but I am sure that if a hiring manager isn’t a developer of people, isn’t fully engaged in the process, can’t clarify job expectations up front and can’t attract great people, he/she won’t hire too many top people.
Recruiters aren’t trained properly. Recruiting the best people is a complex consultative sales process. No company would ever allow its sales reps to sell any important product without significant training.
The talent market is too narrowly defined. The performance-qualified talent market is 10-20 times bigger than the skills-based talent market. Reaping its full potential requires addressing all of the obstacles listed here.
The interview and selection process is flawed. Imagine a business process that’s wrong 33-45% of the time. It would have been discarded long ago. This Performance-based Hiring interview is a great alternative that’s designed to address the career-oriented needs of top performers.
The process is controlled by legal and compensation. When the comp group tells you what to pay the best people and legal tells you how to advertise your jobs, your company is bound to lose out on hiring the best talent. Listen to this attorney from Littler for more appropriate advice.
Job descriptions are barriers to entry. Being skills-qualified is not the same thing as being performance-qualified. Big commonsense idea: Since we promote people based on their past performance it makes sense to hire people the same way.
A company’s talent acquisition strategy should drive its hiring process design, but this doesn’t seem to be the case in most companies especially when cost, compliance and bureaucracy override logic and commonsense thinking. By requiring each hiring decision to be justified on an ROI basis – like every other major business decision – companies should finally be able to break the bonds of this outdated thinking. It all starts with the paradigm-shifting idea that hiring is an investment, not an expense.