Beyond Cost: Calculating the ROI of New Hires
Tuesday, February 16, 2016
Hiring is expensive. But when you compare the cost to the ROI of a great hire, it quickly becomes a bearable, even negligible, expense. And you can further mitigate the expense by hiring well.
According to some estimates, a 15% improvement in performance—as a result of better job placement, a fresh approach promoted by a new employee, or a new skillset infused into a dedicated and cohesive team—can result in a 500% improvement in ROI per new hire.
This concept becomes crystal clear when you put numbers into the equation.
You can calculate the ROI for a new hire at your company with the following equation:
Average revenue per employee x average gross margin and average operating margin per employee (40%) – new hire salary
Using this formula and $500,000 for the average revenue per employee (about midpoint the range represented by large corporations) and $100,000 for the new hire salary we still get a 100% ROI for the first year. And a top-tier candidate will improve that ROI by 30%.
Every year that a top-tier employee stays on, the ROI increases. Reaching a 1000% ROI on well-placed executive within a few years is fairly standard for large, well-established companies.
It’s easy to see the insignificance of a one-time hiring expense for landing a top-tier candidate when you consider the potential ROI of 1000%.
Rather than focusing on reducing the costs of hiring, companies should look towards the ROI. Getting the right person in the right job is worth far more than saving a few thousand dollars during the hiring process.
If you’re hiring this year, give us a call. We can match your opening with the best talent in the industry.