Calculating ROI In Recruiting: How Linking Budget and Fit Yields Insights on Recruiting Investment
Quantifying recruiting activities in relation to their return on investment (ROI) can be a challenge for organizations. While measuring costs associated with recruiting is very straightforward, measuring what those activities yield, in a quantitative way, is a vexing issue. Although all organizations measure employee output in some way - primarily though semi-annual and annual reviews as well as significant projects - few of them tie this back to recruiting spend in order to quantify a return on the activities that brought the employee into the organization.
There are some generally accepted metrics organizations use in this regard, including cost per hire, performance of new hires and interviews per hire, among others. While these are important to track, none are able to directly tell organizations what return their investment in recruiting is generating.
Fortunately, there are some resources that can be used to get a better idea of the ROI realized from spending on recruiting. In particular, the organization HR Open Source authored a case study that attempts to calculate an ROI on recruiting activities by quantifying two factors: hiring budget of the organization and net hiring score, a measure that takes into account employee fit and satisfaction with their job. Combining both of these mathematically helps businesses uncover the return on their recruiting investments.
The hiring budget of an organization is calculated not as a total number, but as a percentage, by taking the total dollar amount invested in all recruiting activities (such as ad spend, technology and travel) and dividing by the total salary of newly hired employees (see below image). Expressing this as a percentage, rather than a cost bucket, can reveal insights about how effective recruiting spend is. For example, if an organization has a hiring budget percentage of 50%, it may indicate inefficiencies in how money is being allocated in recruiting as for every $2 in salary, the organization is paying $1 to recruit talent.
Although an ideal percentage for a company varies by industry and corporate goals, a percentage between 5% and 15% is considered ideal.
Measuring costs, while important, does not capture the whole picture. Organizations also need to find a way to measure the output and impact of the employees they hire. While some of this can be difficult to measure, net hiring score attempts to uncover some of these inputs in a quantitative form. Net hiring score works in a very similar vein to net promoter score, used by brands regularly to gather feedback from their customers. In order to calculate net hiring score, use the following inputs:
90 days after a new employee is hired, ask the hiring manager if they consider the candidate a good fit for the job. A scale of 0-10, with 0 indicating the candidate is not a fit and 10 indicating they are a perfect fit, is used.
90 days after a candidate is hired, ask the candidate if they consider if the job they accepted is the right fit for them. Again, a 0-10 scale is used.
In both surveys, confidentiality is maintained and personally identifiable data is not collected. This protects both manager and employee from negative consequences such as retaliation for a poor score.
Once both have been collected, average the scores across managers and candidates and subtract the promoters (scores of 9 and above) from the detractors (scores of 5 or below) to arrive at your net hiring score.
Take the net hiring score and multiply it by total recruiting spend to see profit or loss from recruiting activities. This can be done either in specific departments or organization wide.
Combining both hiring budget and net hiring score yields valuable insights as to how much, if any, return is realized on investments in recruiting. HR Open Source’s case study details this by assuming that high performers return 2 times their salary in value to the organization, while low performers create a burden equal to their annual salary (these figures, if organizations have more refined data, can be adjusted to match the reality of their business).
Having net hiring score and the payroll of new hires in hand, do the following:
If net hiring score is positive, net return on hiring equals (2*new hire payroll) * net hiring score.
If net hiring score is negative, net return on hiring equals new hire payroll * net hiring score.
This allows organizations and divisions within them to directly quantify the return they are receiving on their recruiting activities. In addition, a system such as this does not require a massive overhaul of any existing systems as this can be managed and tracked with existing infrastructure. As such, it will not require a large investment in new technology, saving capital for businesses to allocate in other places.
Companies have taken notice of these methods. For example, Smart Recruiter introduced a product that attempts to measure net hiring score in the method detailed here. A key difference however is they do not explicitly link net hiring score to costs from recruiting activities as the case study describes, a feature that would make their product more powerful to users.
While this process does a good job of putting a number to recruiting ROI, there are some flaws. One is that it does not account for where a candidate heard about the company or opportunity in the first place. This is something the company can easily measure with surveys during the application process or after the fact, but including it as a distinct part of the formula would help organizations quantify the results of specific recruiting activities instead of recruiting spend as a whole.
Additionally, some of these data points are ones organizations may not be currently collecting. While most organizations have some form of a pulse survey to check in with employees, few follow up within 90 days of a new hire in this manner. For organizations that do not collect this, getting a baseline will take time before insights can be drawn or benchmarks created. This can be navigated, but will require not only a time investment but buy in from employees and managers to ensure net hiring score data is collected.
In closing, while there are many different methods that purport to calculate ROI, most of them are missing some critical element. For example, the website Recruiter.com lists out six different ways to calculate the ROI of an applicant tracking system, and while individually they are helpful and intuitive, each piece is missing an element that allows recruiters to tie together the whole picture of their investment. The method outlined above however combines all elements of the recruiting process in a way that yields a concrete ROI on recruiting spending. It is a straightforward, intuitive calculation that does not require a major overhaul of existing systems to implement, and reveals key insights on the impact of recruiting spending.
Oak Moon is a consulting agency based out of Columbus, OH that helps companies market their brands, define value propositions and uncover customer insights, among other services. If you are interested in hearing more or have questions or comments about this blog, feel free to reach out to me at firstname.lastname@example.org.