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Using Changes in Talent Mix to Calculate Hiring ROI

By Lou Adler, September 2, 2009

©2009. All Rights Reserved. The Adler Group, Inc.

The Basics of Hiring ROI


Caution: you are about to enter the zone of the CFO. Tread carefully. Bring your green eyeshade and calculator. However, if you master this information, you'll be able to calculate the ROI for your current hiring processes and any new hiring initiative imaginable. Beware though, if it turns out that the ROI of your current hiring process is less than 25%, you're in big trouble. On the other hand, if any proposed new program is over 100% you'll be able to get instant CFO approval and a high-five, along with the check. But don't be seduced, any new hiring programs might not work as promised if the economy recovers anytime soon. Then you'll just be scrambling to stay even.

To see the importance of calculating hiring ROI, just multiply the number of people you're forecasting to hire in the next 12 months by their average compensation. This is probably a big number. For example, if you're planning on hiring a group consisting of college grads, experienced techies, and a bunch of customer service reps, you're probably looking at an average compensation of $65,000. If you're hiring 1,000 of these folks, this means you'll be spending $65 million on new hires in the next 12 months, and if you're going to hire 100 you'll be spending $6.5 million.

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In addition, calculating hiring ROI can quickly determine how well you're now doing on hiring for quality, as well as figure out the ROI of any new hiring or sourcing program being evaluated.

To calculate the hiring ROI of your existing process, you need to know three things:

1. the number of people you'll be hiring by job class,
2. their targeted average compensation, and
3. the impact these people will make based on some reasonable mix of talent.

Determining Talent Mix and Impact

If you have a decent hiring forecast, the first two of these are relatively easy to put together. To determine impact you first need to figure out your historical talent mix. This is nothing more than figuring out how many As, Bs, Cs, Ds, and Fs you're likely to hire given your existing sourcing, interviewing, and recruiting processes.

With this information, calculating total impact is also quite easy, especially if you make the individual impact each new hire makes some multiple of the person's compensation. For example, in our model we've assumed that an A+ level candidate contributes 5X his or her compensation, an A level candidate contributes 4X, a B level 2X, a C level is breakeven, meaning this person contributes enough to cover his or her compensation, a D level loses an amount equal to their compensation, and an F level costs the company 5X their compensation.  Total impact is calculated by multiplying the number of people in each talent level by their compensation multiplier and summing these values.

Calculating Hiring ROI

Using the compensation multiplier approach to determine impact, hiring ROI is just the net impact this group of new hires is projected to make divided by their total compensation.

An example will help clarify this. For this, let's use the group of 100 new hires mentioned above at an average total compensation of $65,000. The total compensation spend for this group is $6.5 million. For this talent mix let's assume 10% As, 40% Bs, 40% Cs, and 10% Ds and Fs. This is pretty typical of most companies today, especially in normal economic times when the demand for talent is high and time to fill is short.

On a weighted average this results in an average B- talent mix level, and a total contribution of 1.5 times compensation or $9.75mm in total earnings. This is $3.25mm in net impact ($9.75mm minus $6.5mm), resulting in a 50% hiring ROI.

With a richer mix of higher level talent the ROI would obviously increase, but getting to an average B level talent mix, requires a lot more As, half as many Cs replaced by Bs, and very few mistakes. Pulling this off would increase the total contribution to 2X compensation for a hiring ROI of 100%. This means the company earns a net dollar for every dollar in compensation.

Calculating the Incremental Hiring ROI of Any New Recruiting Program

Determining a company's current talent mix level is the first step in determining the ROI of any new program designed to improve this mix. The net gain due to this improvement can then be compared to the cost of the program to calculate ROI. This is the part of the analysis your CFO will enjoy criticizing. The increased contribution by improving the talent mix is referred to as incremental hiring ROI.

For example purposes, let's use the same B- level talent mix described earlier and figure out how to get 10% better. Essentially, this requires replacing a fair bunch of the Cs, Ds, and any Fs (10% of the total group size, in fact) with Bs, B+s, and one or two more As. From an internal process standpoint, it means you would have to stop doing some things and start doing a lot of other things. Using our talent mix model this results in a talent mix midway between the B- level and a full B level, and a contribution multiplier of 1.75 times compensation.

Now for the CFO high-five part. To calculate the incremental hiring ROI of getting this 10% improvement, all you need to do is figure out what it costs to hire these 10 stronger people and compare this to the impact the total group now makes. It's important to note that incremental hiring ROI is fundamentally different than total hiring ROI. Total hiring ROI is calculated by comparing total net impact to total compensation. Incremental hiring ROI is calculated by determining the increase in total net impact to the investment required to obtain this increase.

In the original example, a 10% increase requires 10 better hires and 10 fewer bad hires. This shift increases the net contribution of 100 people from $3.25mm to $4.8mm, for a $1.6mm net increase. If it costs $100 thousand to obtain this, the ROI would be 1500%, which would get most CFOs to smile, if it were validated. Using this approach, to calculate the ROI of any new hiring program you first need to determine your current talent mix baseline and then use the improvement in this talent mix to justify any proposed expenditure. 

In the example, if you prove you can obtain this 10% improvement, it's obviously a remarkable ROI, one that both your CFO and CEO will notice. However, now for the bad part. While this approach for calculating the ROI of any new hiring initiative is valid, as the economy recovers, getting the forecasted improvements will be more difficult. Once the demand for talent increases, you'll need to implement a bunch of new programs and add staff just to maintain the status quo. Regardless, you can use the same ROI concept, but use preventing the loss of some of your existing talent worsening your current talent mix profile as the justification for the expenditure.

Alternatively, to minimize the loss of talent due to increased demand you could train your recruiters and manager to use Performance-based Hiring. This could be either as a standalone process or in parallel with any of your new hiring initiatives. Performance-based Hiring will ensure you achieve the full projected ROIs despite the economic recovery.

While this might seem a bit self-serving, without a systematic approach to hiring like Performance-based Hiring that considers sourcing, interviewing, recruiting, and retention collectively, you'll most likely fail to hire many of the best people you find, or lose some of the best you already have out the back door. More importantly, you can do this at such a low cost the ROI is staggering. (Send me an email if you'd like to see how Performance-based Hiring can improve your current talent mix, and make sure you invite your CFO along for the evaluation.)