“How much would that person cost?”
If you’re working with a hiring manager who asks that question, they might need to rethink whether it’s a hire they really need.
I’d even go as far to ask whether any employee you define as being a cost to your business should be an employee of yours.
Because a hire you need or an employee you pay shouldn’t be a cost. It’s an investment. It’s easily the most important investment that any business can make. An investment in people.
It’s all about the return
Imagine you’re approached tomorrow by Debbie - a real A player sales figure. A true heavyweight with fabulous, relevant industry experience and a demonstrated track record of producing a return of at least 600% in margin against their salary, commission and benefits.
Obviously, you’d hire them. That goes without saying. But would you see hiring that person as a cost or an investment?
The latter, I’m sure.
You know that whatever you invest in paying their salary, commission and benefits, they’ll probably return 5-6 times over in margin. Calculating the return on sales-focused roles is easy because it often boils down to financials that are simple to understand and compare.
Salary: £50,000 + Benefits: £8,000 + Commission: £50,000 = Total Investment: £108,000
Margin / Total investment * 100 = 648%
Meaning that for every £1 you invested in that employee, you made £6.48 back.
If only it was always that easy
For roles that are focused on delivering tangible results, like salespeople, recruiters, marketers, financial advisers and footballers, it can be easy to monitor performance and calculate the return you’re getting on investment, not to mention that individual returns are typically higher.
For other roles with deliverables that are harder to put a value against, it seems to get tricky.
Introducing Human Capital ROI
Calculating your Human Capital ROI (HC ROI) can help you put a general figure against every pound you invest in compensation or benefits.
Calculating your HC ROI is simple:
(Revenue – Operating Costs) / Human Capital Investment (salaries, commission, bonuses, benefits etc) = HC ROI
For example, Company A’s revenue is £890,000 and operating costs are £640,000. £230,000 of that operating cost is Human Capital Investment.
£890,000 – (£640,000 - £230,000) = £480,000
£480,000 / £230,000 = 2.09
Meaning that for every £1 Company A invest in human capital, they can expect to see a return of £2.09
Is HC ROI a fair measure?
On the face of it, Debbie has an astounding return and, granted, she’s clearly earning her keep.
That said, Debbie is reliant on your other functions to enable her to do her job, whether it’s the marketing team who helped put together the pitch that closed the deal, the manufacturing team who took responsibility for the production of the product or logistics who worked to get it to her client on time. She needs accounts to invoice it all effectively and customer service to quickly and efficiently deal with even the most minor of bumps in the road.
She relies on the marketing team who generated the lead and put together the pitch that helped close the deal.
Then she relies on the manufacturing team to create the product to specification and logistics to get it to the end client on time.
After that, it’s time for accounts to step up and invoice it effectively.
All the while, in the background, the HR team are making sure that all those functions are staffed, engaged and productive. The finance team are making sure that Debbie is paid, and the lights are kept on. The customer service team are quickly and efficiently dealing with any bumps in the road.
So, if you’re viewing new hires as a cost, you’re recruiting wrong
Anyone you view as a cost rather than an investment simply can’t be that important to your business, so think long and hard about it.
You’ll either decide that you don’t need to make the hire or have a better idea of the return you’ll get for the money you invest in them.