The hiring process is costly. From recruitment and vetting to onboarding and training, your business is probably spending a small fortune each year to attract, hire, and retain the right people. But are you getting your money’s worth out of these expenses? Are you getting a good hiring return on investment (ROI)?
In short, your hiring ROI is a quantifiable measure of the value you are yielding from your employees relative to the costs that go into the hiring process. This measure is based on the performance, productivity, and long-term value that hires represent to your organization. Naturally, the higher this value is relative to your hiring expenses, the better your hiring ROI is.
In contrast, if the margin between the cost and value of your new hires is small, it may make sense to reexamine your hiring process. In the article that follows, we’ll provide instructions for calculating your hiring ROI. We’ll also offer tips for how you can use this figure to evaluate the effectiveness of your hiring process, and how you can reconfigure your hiring strategy to promote better outcomes.
Let’s start with a quick overview.
What is Hiring ROI?
Hiring ROI is a metric that companies use to evaluate the total costs of attracting, selecting and onboarding employees relative to the value added by these employees. This metric can provide insights into the efficiency, cost-effectiveness, and success of your hiring program. In turn, these insights can be used to help you determine whether or not your current investment of time, resources, and capital in talent acquisition is justified by the contributions that your employees are making to the business.
The Hiring ROI Formula
The hiring ROI will typically be expressed as a percentage, which indicates the rate of financial growth created by your investment. The formula for calculating hiring ROI is as follows:
- Hiring ROI = [(Final value of investment in hiring – Initial value of investment in hiring) / Cost of investment] x 100%
- Example: Let’s consider a hypothetical scenario in which you’ve hired an employee for a total cost (including recruiting, onboarding, training, compensation and benefits) of $100,000. Let’s consider that in this hypothetical scenario, your new employee remains with you for a minimum of a year, meets performance expectations, and contributes to the creation of $160,000 from sales and completed projects. In this scenario:
- Where the final value of investment in hiring is $160,000;
- The initial value of investment in hiring is $100,000; and
- The cost of investment is $100,000:
- Hiring ROI=[(160,000−100,000)/100,000]×100%
- Hiring ROI=.6×100%
- Hiring ROI=60%
The hiring ROI for the employee in this scenario is 60%, which means that for every dollar invested in this individual, your business generates $.60 in return. As we’ll discuss in a later section on interpreting your results, this would be considered strong hiring ROI.
But before you can perform this calculation, you need to take a number of costs into consideration. As we’ve already noted, there are quite a few factors that go into your total hiring costs just as there are quite a few factors that must be used to assess the value added by each individual employee. We’ll dig a little deeper into these factors below.
Key Hiring ROI Factors
As the formula above demonstrates, hiring ROI is a product of both the cost and value of your hires. Before you can implement the formula above, you’ll need to calculate a sum total for each of these. The factors below may be used on a collective basis to establish your total cost for hiring, or on an individual employee basis in order to establish your total cost per hire.
The Costs of Hiring
Your total cost for hiring should include the following factors:
- Advertising costs related to posting on job boards, career sites, social media, and in print ads
- Recruitment agency fees and commissions for support from external employment services
- HR resources dedicated to recruitment and hiring including HR staff compensation and company time spent on each step in the process
- Screening costs including background checks, pre-employment testing, and time spent by hiring managers or senior executives on interviews
- Onboarding costs including expenses for training, IT setup, orientation programs, and administrative overhead related to new employee integration
- Salary and benefits including take-home pay, healthcare coverage, 401(k), and more
These factors form the basis for your total cost per employee, or per a group of employees. Your specific employment structure may also require you to include factors like signing bonus, relocation costs, transportation expenses, office space, office supplies, and more.
Gather these figures together to establish a measurable total cost for hiring.
Value Added by Your New Hires
Calculating the value added by an individual employee or group of employees can be a little more difficult to quantify. How you arrive at each of the figures listed below will depend on a variety of factors, many of which will be specific to the nature of your business.
That said, the following are some of the factors you’ll want to take into consideration when calculating the value produced by an employee or group of employees:
- Organizational performance metrics indicating an employee’s actual performance against expected outcomes, which may be represented as sales numbers, productive output, measurable quality of work, etc.
- Estimated contribution to revenue, which may be measured in sales converted, projects completed, contracts executed, etc.
- Cost savings represented by improved efficiencies, streamlined processes, improved quality control, reduced wastage, etc.
- Longevity, with higher employee retention leading to lower replacement costs, higher employee morale, and a more productive company culture.
How your organization calculates each of these factors will vary depending on the nature of your business. But the goal is to build a meaningful and comprehensive figure to represent the monetary value created by individual employees and/or groups of employees.
Interpreting Your Hiring ROI
Before you can make any decisions based on your current hiring ROI, you need to understand what this figure means. As noted above, your hiring ROI will be represented as a percentage.
- A negative hiring ROI–a number below 0%–is an indication that the costs associated with the hiring process are outweighing the value created by those being hired. Depending on where you are in the lifecycle of your business, this may be an indication that you need to reexamine your employment structure and hiring processes.
- A positive hiring ROI–a number above 1%–is an indication that your investment in hiring is yielding positive returns.
- A high hiring ROI may be considered any figure above 50%, which is an indication that your business is yielding $.50 of value on top of every dollar spent per employee.
Why Hiring ROI Matters
There are a lot of factors that enter into making this calculation. And arriving at a meaningful hiring ROI does require a clear and measurable way of understanding employee performance. For small businesses and startups, these metrics may not yet be entirely clear.
But there is tremendous value in better understanding how your recruitment costs measure up against the value created by each employee. Once you have a clearer picture of your actual hiring ROI, your business can:
- Optimize recruitment spend by honing in on the hiring strategies that provide the best and most cost-effective returns
- Refine talent acquisition by identifying the hiring methods and channels that ultimately bring the best long-term candidates through your hiring funnel
- Improve employee retention by pinpointing and addressing flaws or shortcomings in the recruitment, vetting, or interviewing processes
- Align hiring with business goals by ensuring that your hiring strategy, employment structure, and labor mix are generating the value needed to achieve profitability and growth
How to Improve Your Hiring ROI
So now that you’ve calculated your ROI, you understand how to interpret the resulting figure, and you recognize the implied value of this interpretation, what can you do to improve your company’s hiring ROI?
Naturally, this will depend on the conclusions you draw from your own data, but there are few best practices that you might consider incorporating:
- Refine your recruiting methods by upping your spend on the most effective channels, whether you see your greatest yield from employee referrals, social media ads, digital media placement, etc.).
- Suspend underperforming recruitment channels, such as costly employment agencies or digital media managers that might not be yielding expected outcomes.
- Invest in training and development, ensuring that new hires are given the best opportunity to succeed in their new role as well as to grow within your organization.
- Enhance candidate screening and selection process by ensuring that the candidates you hire match the job qualifications, company culture, and personality type required for a given role and organization.
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At Success Portraits, we’ve created a personality assessment tool that is designed to support businesses in each of these areas. Our Success Portraits Personality Test (SPPT) lets you evaluate prospective candidates on 19 distinct personality traits including Cooperation, Creativity, Vision, and Self Regulation.
The SPPT is a powerful and cost-effective tool for understanding how each prospective employee is likely to perform under a variety of working conditions, and consequently, may help you to form a more complete picture of each prospective employee without significantly raising your cost per hire.