Calculating the Financial Impact of Not Hiring the Top-Third

As you know the best people typically don’t look for new opportunities the same way as everyone else does. For one thing they’re looking for careers, not lateral transfers, and they find them largely through some type of networking effort. This suggests a massive shift away from generic job boards to new tools for networking including the implementation of an aggressive employee referral program. It also implies using a different approach for closing that gets candidates to consider the long- and short-term factors in balance before making any decision.

As part of this, the best people always want more information before deciding to even engage seriously with a company. Formally adding and/or expanding the step between first contact and the formal application process might be a worthy solution. Without it you’re probably losing the best prospects for avoidable reasons.

Complicating matters is the fact that it’s very difficult to discern differences between the top- and bottom-third during the interview. This is why there is such a difference in on-the-job performance, even among the fully-qualified.

The economy also is about to enter back into the equation. Attracting, assessing, and hiring the top-third will become more difficult as the economy recovers. A Jan. 5, 2010 Time magazine article, “U.S. Job Satisfaction Falls to Record Low,” predicts an upcoming surge in employee turnover. Your best people are likely to be part of this, and replacing them with equivalent talent will not be an easy task.

Here’s a quick way to gain a sense of the financial impact of all this. First determine your company’s revenue per employee (RPE). This is public information for most companies. For example, for Microsoft it’s $628 thousand, and for United Airlines it’s $404 thousand. Now multiple this by some estimate of variable profit for each new employee. This is probably somewhere between 20-50% depending on your company’s business. Now multiple this by the RPE to get average profit generated per employee (APE).

Using 50% for Microsoft, their APE is $314 thousand. The APE indicates how much pre-tax profit each employee on average generates. Of course, it varies by employee level and function, but it’s a good indicator to gauge the financial impact made by each employee.

To gain an even better sense of this, divide your employees into three equally sized buckets based on differences in performance – the top, middle, and bottom. For this next step, let’s assume the difference between the top and middle is about 25% and the middle and bottom is another 25%. Equating this to APE, it means the top-third generates 1.25*APE and the bottom-third generates.75*APE. The difference between the top- and bottom-thirds is therefore.5*APE. In the case for Microsoft this is $157 thousand per employee. This means that for each person Microsoft hires who’s in the top-third instead of the bottom-third, the company will earn an additional $157 thousand per employee per year in pre-tax profit. If they shift 100 people this way it’s equal to $15.7 million in profit, and $157 million if they shift 1,000. If they do it every year, they will totally remake the company. And if they don’t do it, you can imagine what will happen.

Hiring the top-third is not easy. It requires better processes, different sourcing, better recruiters, fully-trained managers, and a committed executive team. This will be especially important as the economy recovers and some of your best people decide to pursue greener pastures. What’s interesting is that the ROI of doing it is insignificant, while the ROI of not doing it is catastrophic. Contact us if you’d like to review the calculations for your company and discover some things you can do right away to begin implementing a “hiring the top-third” strategy.