The Dollar Impact of Great Recruiting: A Must-Do Calculation

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.

Final Thoughts

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?”

Dr. John Sullivan, professor, author, corporate speaker, and advisor, is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high-business-impact talent management solutions.

He’s a prolific author with over 900 articles and 10 books covering all areas of talent management. He has written over a dozen white papers, conducted over 50 webinars, dozens of workshops, and he has been featured in over 35 videos. He is an engaging corporate speaker who has excited audiences at over 300 corporations/ organizations in 30 countries on all six continents. His ideas have appeared in every major business source including the Wall Street Journal, Fortune, BusinessWeek, Fast Company, CFO, Inc., NY Times, SmartMoney, USA Today, HBR, and the Financial Times. In addition, he writes for the WSJ Experts column. He has been interviewed on CNN and the CBS and ABC nightly news, NPR, as well many local TV and radio outlets. Fast Company called him the "Michael Jordan of Hiring," Staffing.org called him “the father of HR metrics,” and SHRM called him “One of the industry's most respected strategists." He was selected among HR’s “Top 10 Leading Thinkers” and he was ranked No. 8 among the top 25 online influencers in talent management. He served as the Chief Talent Officer of Agilent Technologies, the HP spinoff with 43,000 employees, and he was the CEO of the Business Development Center, a minority business consulting firm in Bakersfield, California. He is currently a Professor of Management at San Francisco State (1982 – present). His articles can be found all over the Internet and on his popular website www.drjohnsullivan.com and on staging.ere.net. He lives in Pacifica, California.

 

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6 Comments on “The Dollar Impact of Great Recruiting: A Must-Do Calculation

  1. I have been a fan of your writings for a number of years, and have learned a great deal from your interpretation and point of view of the recruiting industry. However, for one of the few times, I have to disagree with your recent article titled ?The Dollar Impact of Great Recruiting: A Must-Do Calculation.? ROI is a key driver of business decisions, yet I?m not sure you advocated the appropriate returns that can be attributed to an investment in corporate recruiting. While the impact of recruiting should never be underestimated, recruiting should not be unduly measured by factors it can not influence.

    You made several good points about the value of employees and the return on investing in them. Several points brought me to the conclusion that the returns you discuss are not, however, well suited for evaluating the recruiting function.

    First, recruiters have direct impact only on the initial quality of a match. For the most part, recruiters don?t make the hiring decisions nor do they make salary determinations for individual candidates. Companies of any size have an entire department dedicated to setting up and structuring compensation. This is why there are entire talent management and compensation analysis industries. Even if a recruiter searches and finds the perfect candidate that has all of the skills, abilities and potential that the company is looking for, the recruiter has no impact on the salary, benefits, work location, work challenges, and future career opportunities it will take to woo or keep that candidate .

    Second, an employee?s contribution to the company is driven by many factors other than his initial potential when he is hired. A prime example of this is in your movie star analogy. Even a great actor can not save a bad movie. Even though the actor put in a solid performance, it will still be remembered as a bad movie that was not financially successful. Another example of this might be Kevin Garnett, who played for the Minnesota Timberwolves. While he is considered a great individual player, he was never able to lead his team to a championship, or even deep into the playoffs. His individual impact on the organization was limited. He was not a ?game-changer? on an organizational level.

    Third, there is value in hiring non-superstars. The majority of a movie or sports teams staff/organizations are made up of role players, they do what they are told to do. These are people you never see on the screen or on the field. Their contributions can not and should not be overlooked, but they have little direct impact on the number of points that are scored or the box office receipts. Their role does not allow them to be an impact player. That is why you see some great athletes traded so often. The teams are looking for the right mix and chemistry to make the team succeed, not just the individual.

    Forth, most superstars do not start out as superstars. The organization has to provide them the resources, training, and opportunity to become a superstar. When the Bulls recruited Michael Jordan, he had not yet become MICHAEL JORDAN. They had to allow him to grow, develop and mature into a superstar. Recruiting may not have been a significant factor in Michael Jordan?s becoming a superstar. You made the point in your article that ?a top performer in one organization may be a bottom performer in another.? How is a recruiter to control if a top performer in another company will be a top performer in the new company? It can be extremely difficult to determine who is going to be a top performer and who is not. It is likely that you will not know someone is going to be a top-performer until they have been on the job for a period of time. This then becomes as more about the company?s ability to manage employees successfully, to provide the tools, culture, management and challenges to allow a good employee to become a ?game-changer.?

    Fifth, the ability to calculate ROI on every employee is not realistic, even for Goggle or GE. The closest one could get is to measure ROI for the individuals who have direct impact on corporate decisions and direction, which most companies already do through incentives like executive bonuses. It is especially difficult in a team environment to pin-point individual contribution that is accurate enough to base modifications to the company?s compensation structure, let alone an ROI that would drive hiring decisions.

    My point is that to understand the return on talent, recruiting is not the investment to be quantified; management is the investment to be quantified. The return on recruiting should be measured on factors that recruiters can directly affect. An investment in good management is what allows recruits to succeed and become game-changers.

  2. The two previous articles on attaching a dollar figure to recruiting efforts were well-written, well thought out opinions on a topic so volatile as to bring a 17 year veteran of the HR industry out of a spreadsheet induced coma and directly to her keyboard (which is now producing thin trails of smoke, by the way) to draft a first-ever written response to an article.

    I understand the sports and entertainment analogies and while both have merit, I personally believe that even the greatest superstar, Michael Jordan, may not have reached his full potential under a different coach than Phil Jackson. Who better to take a young man rich with potential, add him to a team of established players, throw in another player with an ego the size of Texas and a couple of quick-thinking, quicker on their feet ‘background’ players and produce multiple championships?

    To David’s point, a superstar for one company might not be a superstar at another company – leadership must assume its rightful responsibility in retention of talent. It is, however, incumbent upon a recruiter to match not only the skills and abilities a person brings with them, but to also match the talent’s soft skills…those hard to define characteristics, attitudes, beliefs and values that make a person a good cultural fit for a particular manager or team.

    The best recruiters are not afraid of calculating ROI ? if that is, they have a true partnership with their end users. They know the managers and know which employees will fit best under their direction and within their team. Equally as important, they take the time to really get to know the candidate through the interviewing process and understand how that person will respond to the hiring managers. So it seems to me, the way to attach ROI would be to weight the categories of retention and time to fill equally, make hiring managers and recruiters equal stakeholders in the process; thereby forcing an alliance which will ultimately benefit talent, managers, recruiters and the entire company.

    After all, recruiting and retention are like two hands on a piano…the music sounds best when they work together.

  3. David

    Thanks for your comments.

    I know of few corporate positions in our complex business environment that have total control over their role’s output. To me, I have always taken the ‘captain of the ship’ approach where I take responsibility for results, regardless of whether I have total control. I find that it gets you more respect than blaming others. To me it is our job to manage, cajole or educate managers, vendors etc into doing the right thing, so that you get results without formal control. That’s a primary difference between recruiting and true talent management IMO.

    I’d be interested in what you would measure as recruiting’s output or results?

    John

  4. David,
    EXCELLENT counter-point you offer on this article. It speaks to the very essence of the development of potential, something which every respectable and knowledgeable recruiter holds dear. While we certainly revel in those rare moments when we source and recruit someone who is already a proven superstar in their industry, it is even more satisfying when we can influence a hiring authority to realistically view the hiring field we are sourcing for them and look at what is sustainable.

  5. John

    I agree with you that there is a difference between Recruiting and Talent Management. To manage the talent, you have to ?own? the talent. They have to work for you. Once they work for you, it ceasing being a recruiting issue and becomes a management issue. If employees are poorly managed, under/wrongly utilized, poorly compensated, or not given the tools to succeed, how can you hold the recruiter responsible?

    Whether you are a ?captain of the ship? person or not, does not change the effective calculation of recruiting ROI. Most good recruiters have no problem assuming responsibility for their actions or results. It is not a matter of the recruiter having total control of the situation, but a matter of having ANY control of the situation after the employee starts working for the company. I believe that it comes down understanding the difference between taking responsibility for your work, versus understanding your sphere of influence within the company. I simply do not have the ability or opportunity to substantially effect the long term career management of an employee.

    An example of this could be the men working in the engine room of a ship. They are responsible for making sure the engines are fueled and well maintained in order to be able to respond to the captain?s orders. However, I find it difficult to hold the engine room responsible for the direction the ship is steered in. They can hardly be held accountable for the Titanic hitting an iceberg. Is it also the recruiter?s responsibility that a new marketing campaign was unsuccessful? After all, the recruiter is the one that hired them.

    Now if the hiring manager is not provided qualified candidates and is reduced to picking the best of the worst candidates provided, blame the recruiter. If qualified candidates are not being provided in a timely or cost efficient way, question the recruiter. Simple hold the recruiter accountable for what they have an impact on. The recruiter brings them to the table, what happens after they are at the table is out of their control.

    While I am fully in favor of training and educating managers to be able to make the best, most informed hiring decisions possible, it is still their decision. While a recruiter can have input, recommend a candidate, suggest compensation, etc., they still are not the ones with the final decision.

    I feel that the best way to measure a recruiters results is by there effectiveness as recruiters! The best recruiters build a database of qualified candidates. They know what these candidates are looking for in their next position as well as in their career. They know why they are looking to leave their current positions and what would make them happy in a new position. They have a good idea about the candidate?s personality and what kind of team/culture they would fit well into. The recruiter builds this database through the most cost effective means possible; personal and professional networking, cold-candidate generation/cold calling, advertising, branding, etc. In addition to building this database, the recruiter is responsible for being responsive to their clients/hiring managers. Working hand-in-hand with the managers to focus and define the requirements and skills needed for a specific position, developing a sourcing strategy for generating candidates, providing guidance in interviewing techniques, etc. All of this takes place prior the candidate becoming an employee.

    Granted, much of this is difficult to quantify. Over the years companies have made numerous attempts to quantify recruiting. Things such as; calls per day/week, interviews per day/week, profit margins, cost per hire, candidate source, number of candidates submitted, time to fill, the list goes on and on. There is a reason that a lot of these are no longer widely used in the corporate arena, because they were unsuccessful at effectively quantifying the success of recruiting.

    I think that this is the type of corporate thinking that sounds and looks good on paper at the executive level, but in reality, when put into practice on the front lines, is neither effective nor productive. And this relentless drive to over quantify recruiting ends up costing more time and money than it saves or produces.

    David

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