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Measuring Recruiting Value
 

   6/1/2005
“All too often, HR measures look internally at the function and calculate costs. If HR measurement is to have any significant effect on strategic goals, it must provide managers with information to make better decisions regarding talent across the business.”1

All indications point to the fact that the employment market in the United States is on the rise. The SHRM/Rutgers Leading Indicator of National Employment™ (LINE) notes that difficulty in recruiting and new-hire compensation have greatly increased over the last six months. The SHRM® Human Capital Benchmarking Study also notes that 36% of organizations surveyed indicated that recruiting and retaining talent were their top priorities in 2005.2 As industrialized nations shift to a knowledge-based economy, many executives are realizing that without a reliable strategy to attract and retain qualified workers, their businesses could fail.

While some line managers pay little more than lip service to the adage that people are their greatest assets, they become acutely aware of this fact when open positions go unfilled in their departments for months at a time. Not only do unfilled positions translate to lower productivity, unmet deadlines and potential lost revenue, but unfilled positions can also lower morale of existing staff as they struggle to pick up the extra work. As the economy rebounds from the economic recession over the last several years, HR professionals are positioned to play an important role not only in the selection but also in the recruitment of qualified employees.

HR professionals strategically contribute to organizational performance by helping acquire, grow and retain talent in the workplace. They assist hiring managers in selecting qualified candidates by devising interviewing processes that reduce the risk of selecting a bad hire. For example, HR professionals may use behavioral interviewing techniques and structured interviews to select qualified candidates and may even teach these skills to other interviewers in the organization. In labor markets where competition for talent is high, HR professionals also can develop recruitment and sourcing strategies to locate qualified candidates for hard-to-fill openings.

While it is clear from both a practice and research perspectives that effective selection and recruitment techniques impact an organization’s ability to attract good candidates, capturing that value and communicating its worth to line executives may be elusive to some HR professionals. From a practical standpoint, most business professionals in HR and other disciplines evaluate effective recruiting programs not only in terms of what they cost, but also in terms of the value they provide to the organization. Linking recruiting value to the strategic operation of the business is often measured by the quality of the hire and time it takes to fill the position. The cost of recruiting, however, may be communicated by two metrics: cost per hire and staffing efficiency.

Cost per hire, the traditional measure of recruiting costs, is calculated by taking the total of all expenses related to the hiring process and dividing it by the number of hires. This metric includes advertising costs, recruiter and agency costs, relocation bonuses, referral bonuses, screening costs and the costs associated with salary and overhead of the internal recruiting staff divided by the number of hires.3 For example if the total recruiting costs to hire 12 individuals is $228,000, then the cost per hire is $19,000.

Staffing efficiency is another measure that has been gaining attention over the last several years as organizations seek measures to view their recruiting costs in the context of the level of person being hired. Staffing efficiency represents the percentage of total staffing costs divided by the total compensation for the positions filled.4 The conceptual premise of this ratio is that higher level jobs cost more to recruit. This ratio provides a context for measuring recruiting because costs associated with hiring a senior director are typically greater than recruiting costs for hiring a lower compensated employee. To illustrate using the above example where the cost per hire was $19,000, we calculate staffing efficiency by adding up the total salaries for the positions that were filled. In this case, the total salaries for the 12 hires were $1,680,000. Dividing $228,000 by $1,680,000, therefore, yields an efficiency ratio of 13.6%. Using this ratio allows HR and line managers to compare their recruiting costs to the cost of using external recruiters or outside agencies, which typically charge between 25% and 30% of a person’s salary. In this example, the recruiting efficiency ratio of 13.6% compares favorably to 30% if an agency were used. Such a comparison demonstrates HR’s compelling value and contribution in financial savings to the organization. It provides a context that business professionals can readily understand, that is, how less expensive it is when the HR department staffs the openings.

While the above measures explain recruiting cost or efficiency measures and therefore may not directly link recruiting to operational outcomes and performance, cost and efficiency measures are still important to evaluate, as business executives want to account for dollars spent in their organization. For this reason, both cost-per-hire and staffing efficiency measures should be used simultaneously to depict the true outlay of recruiting costs. The former communicates actual dollars; the latter puts these costs in context.

The strategic value of recruiting, however, can be readily linked to time to fill and quality of hire. These two measures translate recruiting activities and costs by demonstrating how recruiting contributes to the overall performance of the organization. While it is clear that a workforce of high-performing employees can boost firm results, this fact is more salient in a knowledge economy, where the skills of the workforce can also be a firm’s competitive advantage. An example of this occurs in research and development (R&D) technology organizations where technology innovation can often lead to new product ideas that can outpace the competition.

HR professionals contribute to high quality of hires by sourcing highly skilled applicants that meet or exceed the requirements for the position and by implementing selection strategies that identify high-potential candidates and reject low performers. For this reason, it is appropriate for HR professionals to take credit for the results their recruitment and selection processes produce. In order to take credit for hiring quality employees, however, it is necessary to use appropriate measures to rate the quality of new employees being hired. There are several ways to track new-hire quality, as indicated below:

    • The quality measure can be taken within the first 90 to 180 days of employment by asking the hiring manager to review the criteria established prior to hiring and rate the new employee on those requirements. Scales of 1-5, where 1 = does not meet the criteria and 5 = exceeds criteria, are often helpful.

    • Because a perfect hire can be driven out by a poor supervisor, lack of promotional opportunity and many other phenomena that have nothing to do with the recruiter or the recruiting process, a potentially more valid procedure is to ask the hiring manager to rate a new hire against the job requirements at the time the candidate is hired and before he or she starts.5

    • Finally, without performance ratings or hiring manager ratings prior to the interview, another potentially effective way to communicate new-hire quality is to compare the candidate’s years of related experience or educational level to the minimum requirements for the position. For example, if several project managers were hired, with an average of nine years of related experience, but the minimum job requirement was five years, then HR is in a position to communicate that its sourcing strategies were effective at significantly boosting the talent and skill level for a particular position.

Time to fill is another measure that communicates how recruiting contributes to firm performance. Time to fill represents the number of days from when the job requisition is opened until the offer is accepted by the candidate. 6 While hiring the most qualified candidate in a timely fashion is important to all managers, in certain business environments, time to fill is of greater value than in others. In billable labor environments such as consulting, effective recruiting practices that attract highly skilled consultants directly contribute to operating goals. The sooner the consultant starts with the organization, the sooner the consultant generates billable revenue. The measure of this benefit to the organization can be calculated by taking the number of days time to fill has been lowered and multiplying this number by the average daily consulting rate. Therefore, if the time to fill is lowered by five days, and the billable revenue for a consultant is $1600 per day, the calculation for this example would be as follows: 5 days x $1,600/day = $8,000.

While the value that recruiting provides to an organization is often intuitively obvious, measures and processes to communicate that value are often not. This is because communicating the cost and value of recruiting can best be done by using several measures, so that both cost and value are accurately represented. During this process, it is important not to view lower costs as the only value that recruiting provides because effective recruiting offers so much more. Effective recruiting includes the quality of new hires that are being brought into the organization and how quickly they are hired. For this reason, HR professionals should utilize all four metrics--cost per hire, staffing efficiency, time to fill and quality of hire--in order to best communicate recruiting value to organizational executives.

Resources

www.jobs.com

www.shrm.org/research/benchmarks

www.pwcservices.com/saratoga-institute

Sources

Brockbank, W. (2001, May). This will be the decade of the human side of business. Praxis, 22-29. Retrieved June 3, 2003, from www.hinduonnet.com/businessline/praxis/pr0302/03020220.pdf.

Lingle, J., & Schiemann, W. (1996, March). Is measurement worth it? Management Review, 56-61.

Ulrich, D. (1998). Delivering results: A new mandate for human resource professionals. Boston: Harvard Business School Press.

Weatherly, L. (2003, March). Human capital--The elusive asset. Measuring and managing human capital: A strategic imperative for HR. SHRM Research Quarterly, 1.

Wiley, D. (2001, August). Human resources capital management: Marking the way for executive involvement [SHRM White Paper].

Endnotes

1Boudreau, J. W., & Ramstad, P. M. (2004, January/February). Talentship: A decision science for HR. Strategic HR Review, 3, 2.

2Dooney, J., & Smith, N. (2005). SHRM Benchmarking Study: 2005 Executive Summary. Alexandria, VA: Society for Human Resource Management.

3Society for Human Resource Management. (n.d.). HR metrics toolkit.

4Staffing. Org, Inc. (2005). Staffing metrics toolkit [Version 3.5].

5Fitz-enz, J. (2002). How to measure human resource management. New York: American Management Association.

6Society for Human Resource Management. (n.d.). HR metrics toolkit.

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