The business case for successful recruitment
What should be the priority when hiring? This simple business case shows the huge benefits of focusing on the quality of hire, including a spreadsheet for you to do your own numbers!
This is a follow-up to an introductory article named "What is successful recruitment?" While we recommend reading it (of course!), don’t worry if you can’t: to understand the business case below, all you need to know for now is that the average cost of a bad hire is very high. Estimates range between 30% and 300% of the annual salary, as we showed. For the calculations that will help as an example below, we will consider 50% as a conservative example. That’s it - you are ready to dive in!
Part 2 - Definition and impact of a good hire
Good hire: a new member of an organisation who fits the role and the context. They can lead to the following advantages:
On-the-job performance: they return their salary with the productivity of their work. Classic examples include delivering a great customer experience, shipping great product features, fulfilling high sales quotas, raising funds effectively and ethically, etc. Less obvious examples include making a positive political impact (for members of a political party), and decreasing complaints (for quality assurance professionals), for example.
Team-wide gains: a person that fits with their job and context is also likely to be motivated and contribute with their positive attitude to their environment, raise the bar in terms of performance for others to follow, and perhaps even introduce best practices for others to learn, making their entire teams more productive.
Long-term impact: such a team member may stay longer, growing progressively the return on the investment made on their hiring and onboarding. They may also keep learning and evolve to roles of larger responsibility or other areas where they might be needed.
ℹ️ Being a good hire or not is fully dependent on the role and the context. For example, when we leave a job that we hate for a job we love, we are likely to turn from a not-so-good hire into a good one. Somehow a different and fun example, the "Peter principle" describes how people sometimes tend to grow professionally in roles where they are good, until they get stuck in a role where they are not that good anymore.It’s not necessary to be an absolute legend to be a good hire: a positive contributor that generally helps build a good work environment also falls within the category. As such, the value of good hires varies massively, even within the same organisation. However, that doesn’t prevent us from estimating the average value of a good hire for our own teams, in a similar way to how we estimated the average cost of a bad hire in Part 1. An important difference is that, while bad hires translate into a one-off cost (because they leave the role soon: resigning, layed off, or changing to a more suitable position), the value of a good hire is typically delivered over many years. As we demonstrate in the spreadsheet that we share below, an average good hire generates every year a value to the organisation that equals 50% to 150% of their annual salary. For the calculations that help as an example later in this text, let’s consider a fairly conservative value of 70%.
Part 3 - Definition and impact of a barely-acceptable hire
Barely-acceptable hire: a new member of an organisation that, while they may be mediocre performers, demotivate their team-mates, and set a poor reference for their peers, they are not bad enough to leave the role.
These individuals aren’t as damaging as bad hires in the short term, but they usually have a worse impact in the long run. Even if their productivity is positive, they generate a negative economic impact, because barely-acceptable hires fill positions that could have been a source of much better outcomes if filled by good hires. The difference between the impact of the better option and the current option is the so-called opportunity cost, and it accumulates as long as the barely-acceptable hire stays. Concrete examples?
A salesperson or fundraiser that consistently gets to around 30% of their quota when the team average is 100% (unless they produce other benefits for the company).
A product manager that designs features that get accepted but customers never like.
A coordinator that seems to deliver results but people in their team leave because of the bad environment they generate.
ℹ️ More demanding organisations that don’t let people stay unless they are truly good, have consequently less barely-acceptable hires and more bad hires. However, these types of organisations often face other challenges derived from letting so many members go. The best solution is obviously to make as many good hires as possible!As for a good hire, the value of a barely-acceptable hire varies wildly depending on the case, but should always be between the value of a bad hire and the value of a good hire - that´s between -50% and 70% in the example we have selected above, with the value of a bad hire being negative because it’s actually a cost. Let’s take a middle-ground 10% to run the numbers that follow.
Part 4 - The numbers
With all definitions clear, we can complete the business case for successful hiring. If you want to get into the details and run the calculations for your own context, we have prepared this thorough spreadsheet (also downloadable as a zip file here). If you simply want the main conclusions, let’s answer some basic questions with the example numbers that we have selected above:
Hired a bad candidate instead of a good one? Even considering only 4 months to replace them for a good one from their start date, the total cost (the difference between the value of a good hire in that time minus the value of a bad one) is already over 75% of the annual salary.
Hired a barely-acceptable candidate instead? The cost (the difference between the value of a good hire in that time minus the value of a barely-acceptable one) will add over 60% of their annual salary every year they stay.
Want to estimate for your entire organisation? Well, start by multiplying the figures above times the number of bad and barely-acceptable hires you make and see how quickly the total number grows massive.
Call to action: measure and improve!
We are sure that you have witnessed the difference between bad, barely-acceptable, and good hires in your current or past professional life and already had an intuitive perception aligned with the numbers above. If you run these calculations yourself, especially at the scale of your entire organisation, you can easily see the massive positive impact of making good hires instead of bad and barely-acceptable ones.
In other words, if your current system is letting wrong hires in, working on addressing that issue becomes a wise investment. Analogous analyses, from different points of views, have been made by recruitment experts and opinion shapers in the field, such as Lou Adler and Dr. John Sullivan.
Ready to make a move? Get in touch! Don’t even know what your current distribution of good, barely-acceptable and bad hires looks like? Don’t worry - we’re here to help with a brief how-to, which we will soon publish. Please subscribe and stay tuned! Feedback, ideas or requests? Please get it touch!