Why do so many companies focus on the cost of hiring rather than the impact the people hired can make?

Consider these basic Finance 101 concepts applied to hiring:

  • At $100 thousand per person, the compensation spend for every 10 staff-level hires is $1 million every year.
  • This group of 10 staff-level hires should, on average, bring in $5 million in additional revenue at $500 thousand per year. Note: This is based on the concept that revenue per employee is a common financial measure and for most firms it ranges from $300 thousand to $700 thousand per year.
  • At a 40% incremental pre-tax profit margin, this $5 million in sales results in $2 million in pre-tax profit. This is why hiring should be considered a major investment.
  • Assuming the A-Team (the top 25%) generates at least 25% more than the B-Team, this is an additional $500 thousand pre-tax profit each year for every 10 people hired! Hiring the A-Team is an even better investment.
  • The cost increase to hire the A-Team is modest in comparison to their impact--approximately $50-100K more than the B-Team for 10 people. The ROI of this is more than 1000% with a payback of a few months! (Here's an ROI of Hiring the A-Team calculator to check this out for yourself using your company stats.)
  • Few companies treat the hiring of people as an investment. Most consider it an expense. This is a fundamental business mistake.
  • All companies requires some type of rigorous assessment when it comes to making any significant investment. Hiring is a significant investment.

If your company is more focused on improving the efficiency of its hiring process rather than the quality of the people hired, it's losing millions of dollars each year. This makes no sense. To get a sense of this lack of sense, classify all of your company's current and proposed hiring initiatives into one of these three classes--efficiency improvements, hiring mistake avoidance or raising the talent bar. The first two are expense related. Raising the talent bar is a strategic investment. With this mix in mind, here are some ideas on how to make the ROI case for hiring more people for the A-Team. This is a worthy investment and worth at least trying out as a proof of concept.

Rethinking the impact and ROI of hiring the A-Team

  1. Consider total costs, not just hiring costs. Aside from the actual cost of hiring a person, few people consider the impact these people can make once hired. Even fewer consider the cost of excessive turnover and the extra time a hiring manager needs to spend managing a weaker person who needs extra support or coaching.
  2. Think investment and strategy, not cost and tactics. You'll never be able to increase quality of hire, increase diversity hiring and raise the talent bar by being more efficient doing what you're now doing. Developing a scarcity of talent strategy starts by dismantling one based on the assumption there is a surplus.
  3. Rewrite your job descriptions by defining exceptional performance, not an exceptional person. There are plenty of A-Team caliber people who underperform in the wrong situation and there a plenty of others who can make the A-Team given work that better matches their talents. That's why it's important to clarify expectations up front and match people to work they find most motivating.
  4. Benchmark the A-Team to reallocate your sourcing efforts and expenses. The A-Team does not look for or find new jobs in the same way the B-Team does. Reducing job board advertising will offset some of the costs associated with having your recruiters handling fewer requisitions and spending more time on networking and passive candidate recruiting.
  5. Slow down and spend more time with fewer candidates. It takes hours spread over weeks for an A-Team caliber person to fully appreciate all of the factors involved in switching jobs. This takes a series of discussions with the recruiter and hiring manger, each one providing more insight into the career potential of the new position. Done properly, hiring managers will not need to see as many candidates to get one hired even though they'll need to spend more time with the few they do see.
  6. Negotiate on career growth, not compensation increases. While you might need to pay a compensation premium to hire some A-Team members, this is not always necessary especially when the job is positioned as a growth move. Even better, by focusing on high potential A-Teamers (i.e., those with less experience), compensation rarely needs to exceed the existing budget requirements.

It's clear the business and strategic impact of hiring the A-Team dwarfs the cost savings associated with hiring the B-Team more efficiently. Optimizing your company's bottom line starts with the recognition that being more efficient doing the wrong things is nothing to brag about.