There is nothing more important in the business world than demonstrating the dollar impact of what you do. Every major business function from marketing, sales, finance, supply chain, customer service, and production routinely demonstrate their return on investment. However, as with many aspects of corporate life, HR tends to be the exception to the rule.
Over the course of my career I have routinely heard complaints of the recruiting function being underfunded, underappreciated, and not taken seriously. Such poor treatment should hardly be a surprise given that most recruiting managers have historically not been willing or able to convert what they do into the universal language of business?dollar impact on revenue. What could be more fundamental and important than demonstrating to senior management the dollar impact of hiring top performers versus average ones? To me, it’s the single most egregious error in recruiting.
The ROI of Recruiting the Right People
Many recruiting organizations shy away from targeting top reformers because they are harder to recruit and in some cases require more pay. To me, such an approach is shortsighted, because it’s not the amount of money that it takes to recruit or compensate these top-performing individuals that matters.
Instead, it’s the amount of revenue or profit that these individuals return compared to their cost. Calculating ROI requires two components: return (revenue or profit) and investment (cost). Unfortunately, too many leaders are laser-focused on the latter (with efforts to contain it, in particular).
However, two industries are light years ahead of the rest when it comes to calculating the ROI of hiring a top performer. The first is sports. Obviously, Tiger Woods would be more difficult to recruit and might cost 10 times more in salary, but his ability to return 15 to 20 times more in winning purses and merchandise sales would make him a smart choice. In basketball, hiring two six-foot “short” centers is much easier and cheaper than hiring one “tall” seven-foot center like Shaquille O’Neal. But if you want to win a championship, the cheap and easy option is just silly.
The second industry that has made a concentrated effort to quantify the ROI of hiring the “right” person is the entertainment industry. Not only did this industry invent the word “talent,” but managers in the entertainment industry excel at calculating the performance differential and the ROI between hiring one actor over another for their movies.
Let’s look at an example to illustrate the ROI of top actors. If you were going to hire a well-known actor for an upcoming action movie you could pick from many obvious choices like Russell Crowe, Tom Cruise, Johnny Depp, Brad Pitt, Matt Damon, and Angelina Jolie, or you could hire “Joe Nobody.”
Each of the well-known actors will cost you significantly more than hiring an unknown newcomer, but each also has a demonstrated ability to attract a greater return. Forbes.com recently completed a calculation of the ROI of top actors and what it found was:
- Matt Damon returned $29 in gross movie revenue for every dollar that he was paid (29X or 29 times his salary).
- Brad Pitt returned $24 for every dollar that he was paid.
- Tom Cruise returned only $12 for every dollar in pay.
- Russell Crowe returned only $5 for every dollar in pay (five times his salary).
It doesn’t take a rocket scientist to do these calculations. The results, even to an untrained eye, are startling. If you hire Matt Damon, he will return nearly six times more per dollar invested than Russell Crowe. That’s not a 6% difference; it’s a 600% difference! If the comparison was made broader to include the comparison of hiring “Joe Nobody” as a lead actor (instead of a noted star), the difference in the ROI would simply be mind-blowing.
The lesson to be learned here is that the “on-the-job performance” of the hire (often called quality of hire) can be quantified and converted into dollars in the sports and the entertainment industry and that the same calculation needs to be done by the recruiting function in the corporate world.
The Performance Differential Percentage Between Average and Top Performers
Whether your focus is on hiring or on retention, it’s critical that you measure and quantify the “performance differential” between average and top-quality performers in order to determine whether it’s worth the time and money to recruit and retain top performers.
The Container Store found a 300% differential, while Jack Welch at GE found a 500% to 1000% differential. The Corporate Executive Board did extensive research on the topic and came up with a 1200% differential across all industries, while Bradford Smart’s Top Grading research found a differential as high as 2400%.
Alan Eustace, VP of Engineering at Google concluded that there was a 30,000% differential between recruiting a top performer over an average one, a perception that may identify why Google is willing to invest so many resources into a recruiting model that is ultra-selective. As Google has proven, building a top talent “recruiting machine” requires unrelenting execution of a well-designed process and the resources to power it.
The ROI of Recruiting Top Performers
Knowing that a top performer can produce 300% to 30,000% provides only half of the return on investment equation. You also have to include the additional cost of recruiting and compensating the top performers in order to complete the ROI calculation.
Let’s start with the recruiting costs. Most top performers are sourced through employee referrals, professional events, boomerang programs, and direct sourcing (either via internal recruiting or commissioned external recruiter). Of these four recruiting sources, leveraging an external recruiter stands out as being the most expensive, but rarely do search fees exceed 40% of the new hire’s starting salary.
While 40% may seem like a lot of money, when it is compared to the value of 1000% greater output, the cost is relatively insignificant. Employer referrals might cost $1,500-$5,000 more than the standard cost per hire, but again, the impact of that added investment pales in comparison to 1000% greater productivity year after year throughout a top performers tenure.
The second “cost” element that must be evaluated in the ROI calculation is the compensation that top performers might earn. With few exceptions, it is rare for an organization to leverage pay differentials that exceed 33% between top and average performers in the same job. In unionized environments, there is often no difference in compensation between top and average performers. If you are getting 1000% greater productivity from a resource and that resource costs you just 33% more, you are winning the ROI battle. Even if the pay differential were higher, say 50%-200%, the costs are again relatively miniscule.
Defining a Top Performer
Some managers think top-performer status is related to educational level, others a candidate’s past experience. Intelligent managers often counter that individuals with the most qualifications do not always produce the greatest output.
What defines a top performer is an ability to consistently produce above-average results and to work effectively within the organization’s culture. Thus, top performers are not “stars” or even the most qualified; instead, they are individuals who produce the top 1% of results and innovations while they are in the job. A top performer in one organization may be a bottom performer in another.
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Calculating Performance Differential
I haven’t met a single CFO who will buy the ROI argument for recruiting and retaining top performers based solely on external data. They expect, as they should, internal proof that top performers or “game changers” really produce a high ROI in their organization.
To start calculating the performance differential in your own organization, sit with the CFO to author a process that he/she will support. Begin by looking at positions that everyone agrees are mission-critical or high-revenue impact jobs. (Note: there is an 80/20 rule in products, where 80% of the profit comes from 20% of the products and you should expect a similar 80/20 impact ratio for positions within the organization.)
Look at positions where output (both volume and quality) of each individual employee is already routinely calculated. Sales positions are a natural choice because the sales function already calculates and posts forced ranked results, making it easy to calculate the output differential between the top, average, and bottom salespeople. Customer-service jobs, call-center positions, programmers, and transactional-focused roles also make great starting points.
Incidentally, in a few organizations, you might find a much smaller difference in performance, but it’s important to realize that if you hire and retain only “average” employees over a significant period of time, almost by definition, everyone’s performance will fall close to the average. In those cases where there is little performance differential between the top and the average, you need to also look at the performance of bottom performers (every organization has them) and then compare it to the average. If you are in a business where routine performance alone is not enough, you also need to estimate the dollar impact of the additional ideas and innovations that these “game changers” contribute.
Once you have completed the performance differential calculations for these initial jobs, add the costs in salary and bonus to the equation in order to calculate the actual ROI for these individuals.
But Aren’t Average Employees or Lower-Impact Positions Important?
I frequently field comments that assert that doing this calculation and highlighting the importance of hiring and retaining top performers in key positions somehow demeans the average employee. It’s important to treat all employees with respect and dignity, but the allocation of management time and resources must be focused on the positions and the individuals who have the highest impact (shareholders expect no less).
If this was a golf team and your job was cleaning the golf balls, you would know right away that although your position was important, it had a significantly lower impact than the work of Tiger Woods, your lead golfer.
Similarly, if you were the third string guard behind Michael Jordan, you would realize almost immediately that although you were important, your role was that of a support person, which should not and could not garner you the same number of playing minutes as MJ!
“The HR profession has gotten into the nasty habit of equating fairness with sameness.”
The lesson to be learned here is that it’s management’s job to educate those in lesser-impact or support positions about the significant impact hiring “game changers” has on every employee’s job security and organizational performance.
Like it or not, average employees in lower-impact positions are relatively easy to recruit and retain. No organization can function without the “average Joe,” but treating top performers exactly the same as average performers will lead top performers to reject your job offers and entertain one of the numerous other offers afforded them.
There is no greater blunder in corporate recruiting then failing to calculate the dollar impact on the business of great versus average recruiting. In direct contrast, in entertainment and in professional sports, recruiters are relative heroes compared to corporate recruiters. Why? Because in these fields, management has integrated the ROI calculation into standard business practices (read the book Moneyball if you want further examples).
As a result, they have made it obvious to fans, managers, owners, and teammates that if you can recruit a Shaq, a Roger Clemens, or a Tiger Woods, you will likely win championships and every player and employee will benefit from that recruiting success.
In fact, the most startling recent demonstration of the value of recruiting came from Major League Baseball, when the Boston Red Sox paid an astonishing $51 million just for the right to recruit a single pitcher from Japan (Daisuke Matsuzaka).
I assure you that if your recruiting organization successfully demonstrates to senior management a significant difference in the dollar impact between average and great recruiting, you will never again be confronted with the silly question of “What is your cost per hire?”