It’s 2016: Let’s Talk Dollars and Sense about Talent
CEOs can easily explain details of their revenue targets, sales projections, manufacturing costs, and new customer acquisition cost. But even though human resource expenses usually make up more than 60% of the budget, most CEOs cannot answer questions like:
- What kind of employees do we need to meet revenue targets and sales goals?
- How much of that kind of talent do we have on staff today?
- In 2015, how much did we spend on hiring?
- In 2015, how much did bad hires cost us?
Building the right employee team is a business challenge that desperately needs CEO attention. Unfortunately CEOs don’t usually learn about talent management – it isn’t sexy enough for most B-schools.
Fortunately a lot is known about how to measure talent success and hire the right people.
Think about your current employees and their financial impact. For example, think about the top sales rep – what would it mean to the bottom line if the company found two more employees who could perform like that? How about customer service – would customer retention improve if there were a few more amazing customer service employees? And your tech staff – if you had the right ones, could there be less re-work on technology systems?
When CEOs begin to pay attention to employee quality and hiring success, the result has a high ROI. The business gets clarity about the talent it needs. Getting the right employees on the team can increase productivity, revenue, and profit by 20% – 60%.
CEOs can begin to get managers focused on talent by collecting baseline information using three talent measures:
- revenue per employee
- cost to hire.
These data instantly improve a CEO’s understanding of the relationship between talent and financial performance which in turn supports better human capital decisions and a better bottom line. Get started by using these three formulas.
Revenue per Employee
Revenue per employee is a measure of how efficiently an organization manages employees. Generally, higher revenue per employee is positive. Over time rising revenue per employee indicates increased efficiency, which should lead to better margins and improved profitability. Comparing Revenue per Employee to other organizations in the same industry may be helpful.
R = TR / AEFY
R = Revenue per Employee
TR = Total Annual Revenue
AEFY = Average number of employees during the fiscal year
Because human capital plays such a large role in a firm’s financial performance, the negative impact of employee turnover should get the CEO worried: costs to replace employees are significant and the link between high turnover and lower financial performance is strong1. When employees leave, their knowledge and skills walk out the door with them…and so do their customer relationships.
One of the highest costs related to turnover is the cost of lost productivity and the time it takes a replacement employee to ramp up. It takes at least six months for a new employee to learn the position and the organizational culture, longer for senior level new hires.
T = (NS / EE) X 100
T = Turnover
NS = Number of separations during the time period
EE = Number of employees during the time period
No matter how the economy is doing, the best employees always have job options and research finds the financial performance of organizations with lower turnover is significantly higher than those with high turnover.
Cost to hire
CEOs consistently report that finding the right talent is one of their biggest challenges. The cost to hire is substantial, but is rarely calculated – and that is a problem. The cost to hire a junior employee is easily more than $5000! Tracking cost to hire helps CEOs see the financial impact of turnover.
Measuring hiring cost helps focus attention on the business need to hire right and manage effectively to reduce turnover and costs. The typical total cost to hire one employee is 20% to 150% of annual salary. Actual costs vary as a function of the position— it costs more to fill positions that require special skills and advanced knowledge. Costs are even higher when you are hiring after making a hiring mistake.
Measure costs at the organization, division, and department levels to see evaluate the quality of hiring decisions across the organization2.
CH = (.25 x A$) x NH
CH = Cost to Hire
A$ = Average Annual Employee Salary
NH = Estimated Number of Hires in 2015
The best way to maximize the return on talent investment is for the CEO to work as closely with the HR director as with the CFO. The CEO should demand the same kind of accurate, timely data from HR as for finance, sales, or operations. The analysis of critical talent data leads a better bottom line.
1 Huselid, M. 1995. The impact of human resource management practices on turnover, productivity and corporate financial performance. Academy of Management Journal, 38(3): 635.
2 Soileau, Paula A. 2010. Quick Calculation of Hiring and Placement Costs. Unpublished documentation.