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Human capital ROI: How can your business break even or better on new hires?
14 August 2017
There’s an interesting conundrum developing in the recruitment and retention of talent. How long does it take for a business to get a positive return on investment (ROI) on a new hire and does that length of time match up to the period the new hire intends to stay in the company?
When a business makes a new hire they will have spent a great deal of money on a recruitment fee (in-house or external) and time on the recruitment process. Then comes the induction, training, coaching and getting the person properly on-boarded. There’s the first few months’ salary to throw into the mix too. At this point the return on investment is zero. Stretching this out further, how many organisations get a return on investment inside the first 12 months?
The tricky bit comes when you consider the career aspirations of the new hire themselves. Gone are the days of a job for life. If a person stays for 5-10 years, a return on investment should be no problem – if the person hired was a wise choice and performs in a good fashion. But millennials in particular, aren’t thinking about 5-10 years when they take a new job. They’re thinking 2-3 years at best and the average stay could only be 18 months. Do companies ever get a positive ROI in 18 months?
The challenge for companies is how do they find people who are going to stay for 5-10 years plus? And if that isn’t possible or realistic, how do they ensure a new hire stays for 2-3 years and gives them a positive ROI? The solution isn’t easy. The mindset of the millennial employee, together with more opportunities, more mobility, more sharing of information, mean that there’s more awareness of opportunities than previously; more chances for an employee’s head to be turned.
Sir Richard Branson sums the situation up well with his philosophy that a business needs to “train people well enough so they can leave, but treat them well enough so they don't want to” and there’s also this infamous exchange between a CFO and CEO which is also relevant:
CFO: “What happens if we invest in developing our people and then they leave the company?”
CEO: “What happens if we don't, and they stay?”
The long and the short of it is that as an employer, you should be thinking about how quickly you can get a positive ROI from new hires, but then if you’re not thinking about what comes next for your high-performing employees after 2-3 years then someone else certainly will be.
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This is looking at the problem from a holistic perspective, when of course there are different challenges and nuances in different professions. A sales person may only be in a position for 6 months, but if they win a massive piece of business during that period, they may well have returned a positive ROI. Someone else might be in a similar role for 5 years, but not deliver a big win and all the time and money they’ve absorbed, mean it wasn’t a positive ROI.
If we move into HR, a senior hire could spend 2-3 years in a role trying to put in place new measures but hit roadblock after roadblock and leave having accomplished nothing. Their replacement will come in and start the process all again, meaning the investment is negative twice over.
At the other end of the ROI spectrum are some of the biggest digital companies on the planet. At the executive level in these billion dollar organisations, people can come and go quickly, but the person’s intellectual property will often have made a positive difference and the company millions in a short period of time.
For most businesses, however, there’s the very real concern that the financial costs and time taken to make and on-board new hires is increasing, while the length of stay in a new position seems to be shortening. The challenge of getting a positive ROI from new hires is getting tougher.
Employers can balance the need to invest in and develop employees with the desire to see ROI on their hire before employees move on through the following strategies:
- Consider the different challenges and nuances of seeing ROI from different roles and positions
- Understand that ROI looks different across industries eg sales generated in retail vs intellectual property contributions in digital
- Remember Sir Richard Branson's philosophy that a business needs to “train people well enough so they can leave, but treat them well enough so they don't want to”