Think Twice: Cost
Per Hire - Don't Even Bother
Hiring costs are such a small
percentage of an employee's value that figuringcost-per-hire
is usually a waste of time.
By Todd Raphael
We must find out what he's worth.
That's
what Texas Instruments said as one of its top techies was
being wooed by a recruiter working for a competitor. TI, one
of the world's great chipmakers, added up all the ideas that
the employee had generated for the company, and what that
was worth in terms of patents.
TI decided that the employee was probably fairly valued at
about $25 million. Yes, $25 million. The company also decided
it was worth its trouble to get the employee to stay. TI gave
him a nice amount of stock, structured in a way that provides
an incentive to stay another decade. Also, TI arranged for
a week of private golf lessons for him and his wife at a famous
golf resort.
If employees are so valuable, it's silly to spend time and
money trying to decide whether we should shell out $1,200,
or $1,2000, or $30,000, to source and potentially relocate
an employee. Measuring these expenses occasionally can be
worthwhile when hiring large numbers of employees with similar
skill levels. Usually, though, the whole exercise is a joke.
John Sullivan, one of the leading recruiting experts in America,
has little interest in cost per hire. Instead, he spends his
time helping companies make calculations like TI's.Think about
it, Sullivan says. If you were going to buy a steak, would
you compare the cost of one at Denny's to that of one at Morton's?
Of course not: the products are very different. And you'd
buy one at one point and the other on a different occasion.
If you were getting brain surgery, would you compare its cost
with that of a less complex, more standard operation? No.
You'd just do whatever you could to get the best. Is a $1,800
laptop the same as a $500 laptop? No. You pay more, you get
better quality. You cannot compare the price of two items
and not compare their value.
Pamela Ferrell combs the entire world for people Texas Instruments
can hire. She says the organization doesn't keep track of,
or care, what it spends to hire someone. Her team recently
stole an employee from an Israeli competitor, racking up relocation
costs and spending money to fly him across the world for interviews.
"Nobody gets paid what they're going to bring in," Ferrell
says.
Employees are such a bargain, and hiring costs are such a
small percentage of an employee's value, that fretting over
the cost of a hire is like agonizing over whether the gumball
machine will give you seven or eight gumballs for a nickel.
Who cares?
Measuring the cost of each of your hires is one way to spend
time. It takes a lot of it. Don't do it. It's a waste. Instead,
every HR and recruiting pro should spend time measuring what
a top employee is worth. Compare that to what an average employee
is worth, and then sprint to your CFO's office with the numbers.
Ultimately, if you realize how much more top employees are
worth, you'll realize you can spend a ton more to hire them.
Sullivan says that Cisco's employees each generate $700,000
to $1 million in revenue, a figure determined by dividing
company revenue by the number of employees. That's far more
than you pay to acquire or pay people.
You might think if you're not talking about technology employees,
that the differences between employees would be very subtle.
In other words, you might think that one McDonald's employee
is worth about the same as any other McDonald's employee,
so keeping hiring costs low is essential to fast-food success.
Wrong. A top McDonald's manager, Sullivan says, is worth 35
percent more in profits than an average employee.
A top PR person is worth far more than an average one, a calculation
based on the number of newspaper columns, television news
shows, or Web-site pages her client has appeared in. Sullivan
has even measured something as abstract as what a strong journalist
is worth. To do this, he took into account readership, name
recognition, the volume of articles written, the quality of
articles (assessed by an independent panel), the number of
times the article was downloaded or e-mailed, comments by
advertisers, rankings by fellow journalists, the number of
times the journalist has been cited and quoted, and comments
received.
Gosh, if we could just include negative comments, I'd be living
high on the hog. Your CFO understands this return on investment.
Sullivan says that he's repeatedly seen that whenever someone
calculates the value of employees, and shows how important
it is to pay more for them, that person is suddenly very valuable
to her company.
"Most people who do these calculations then go in and ask
for a raise." Workforce, June 2002, p. 112
