How to Calculate the ROI of Hiring the Best Person Possible

Last week I asked a group of talent leaders to summarize their hiring challenges. Here's their 80/20 short list:

1. We're not seeing enough qualified candidates
2. Hiring managers aren't engaged
3. The best candidates want more money than the budget
4. The interview doesn't predict on-the-job performance
5. Nobody wants to relocate
6. Hiring managers aren't capable of hiring top talent
7. Our recruiters don't have enough time to recruit passive candidates

I then asked, "For these positions, is there a shortage of great talent or a surplus?" Their quick response: shortage. My equally quick response, "You can't use a surplus of talent strategy when a surplus of talent doesn't exist." I then went on to describe the difference in both strategies and suggested that all of their hiring challenges were caused by the wrong hiring strategy.

If you weren't at the meeting you can watch this short video (or catch it on YouTube) describing the differences in both strategies.

The big difference:

• A surplus of talent strategy involves weeding out the weak.
• A scarcity of talent strategy involves attracting the best.

Determining the Financial Impact of Improving Quality of Hire

We just created this Quality of Hire ROI Calculator to determine the financial impact of implementing a Scarcity of Talent strategy to attract stronger talent. It's pretty basic but it presents an important issue in financial terms that's typically not considered. It requires some financial stats to make the assessment, but things like revenue per employee, operating margin and average salary per employee are publicly available for most companies. One question the calculator answers is, "What type of performance improvement would be needed to pay someone a salary premium?" For example, if you pay someone 10% more and they do 20% more your ROI is 200%. (Job-seekers: if you want a pay increase prove you'll achieve more.) That's how you convert a cost for hiring into an investment in talent.

I remember a presentation a few years back where a somewhat nervous woman went in front of group of hiring managers and said something like, "We're about to hire 75 sales reps at an average salary of $100 thousand each. That's an investment of $7.5 million. We're going to use this day of training to make sure we do it right." At that moment she was no longer nervous.

In few cases is the financial impact of a hiring decision fully appreciated. The Quality of Hire ROI Calculator puts this in easy to understand terms. But there's a bigger issue at play. First, why do companies insist on using a surplus of talent strategy in the first place when it's clear there's never a surplus of top people? As a minimum it prevents them from seeing and hiring the best people possible. The calculator can't possibly figure out the cost of doing that.

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Lou Adler (@LouA) is the CEO of The Adler Group, a consulting and training firm helping companies implement Performance-based Hiring. He's also a regular columnist for Inc. Magazine and BusinessInsider. His latest book, The Essential Guide for Hiring & Getting Hired (Workbench, 2013), provides hands-on advice for job-seekers, hiring managers and recruiters on how to find the best job and hire the best people. You can continue the conversation on LinkedIn's Essential Guide for Hiring Discussion Group.