How to Calculate Recruitment ROI
Effective recruitment is essential for any business. That means sourcing and hiring great candidates efficiently—and ensuring your investment in them is worthwhile. But how do you judge the success of your recruitment efforts?
Recruitment ROI (return on investment) is a crucial HR metric that measures an employee’s long-term value to the company against the money you spend on hiring and retaining them. Simply put, a high ROI shows you get maximum bang for your buck.
In this post, we’ll show you how to calculate ROI for recruitment, including what costs to factor in and how to assess the value of new hires.
How to calculate your recruitment ROI
Now, let’s take a look at the steps involved in calculating recruitment ROI.
Gather reliable and accurate recruitment data
Just as you would for any other business metric, you should start by collecting the relevant data. In recruitment, this will include any information on hiring costs, money spent on retaining employees, and both quantitative and qualitative data regarding employee performance and value.
These are the figures you’ll need to make the calculation:
Net Benefits (NB) denoting the total value generated from the new hires
Net benefits signify the value that new employees bring to your business, directly and indirectly. “Value” includes factors such as individual and team productivity, increased revenue, and overall business success.
You can quantify this value by using specific metrics that align with your business goals. To find the net benefits generated by your new hires, you’ll need to subtract the total costs from the total benefits.
Total Costs (TC), including all expenses relevant to the recruitment process
Total costs refer to all the expenses your business incurs during the hiring process. This will include the cost of placing advertisements, paying an external recruitment agency, carrying out background checks, recruitment software, and interview expenses.
Apply the formula for recruitment ROI to gauge hiring success
Once you know your net benefits and total costs, the good news is that you can calculate recruitment ROI with a simple formula:
Recruitment ROI (%) = [(Net Benefits – Total Costs) / Total Costs] x 100
So, if the net benefits add up to $7 million, and you spent $4 million on recruiting the new hires, the calculation would look like this:
[(7 – 4)] / 4] x 100 = 0.75
As recruitment ROI is expressed as a percentage, your ROI would be 75% in this case.
Assess data for positive or negative hiring ROI
A number such as 75% is a positive hiring ROI. If your total costs outweighed the net benefits, you’d be looking at a negative ROI. But don’t just take this percentage at face value—look at the individual metrics involved to see if there’s room for improvement.
Gauge ROI against industry benchmarks
Whether your ROI is positive or negative, it’s a good idea to check it against that of other companies in your niche. There’s no standard figure for what represents a “good ROI,” but if yours is lower than that of your main rivals, that’s even more reason to make improvements.
Identify recruitment areas needing improvement
As we mentioned, you need to drill down into the recruitment data to find ways to improve. For instance, if your time-to-hire is too long, you might automate manual processes for efficiency.
If the application completion rate or offer acceptance rates are low, perhaps you need to make the candidate experience more appealing. 81% of job seekers say that candidate experience influenced their decision to accept an offer.
What to include to calculate recruitment costs
Let’s go back to those total costs—what do you need to include?
Direct, indirect, and hidden costs
Some recruitment costs are directly connected to a tangible “cost object,” such as the money you spend on placing job ads. Indirect costs are those necessary to your operation, such as office rent, software, and the salaries of your recruitment team.
You also need to consider the ongoing cost of retaining new employees, including equipment, software, onboarding, salary (and any payroll or integrated payments software used), benefits, and career development.
Then there are hidden costs, such as low morale and decreased productivity caused by a “wrong” hire who has to be replaced—plus the opportunity cost of a poor candidate experience.
Cost allocation methods
Cost allocation means identifying costs and assigning them to specific cost objects. This helps you to connect a cost to something specific so you can identify the cost objects that are profitable or otherwise.
The fixed cost allocation method links specific direct costs to cost objects, while the proportional allocation method assigns indirect costs. Either way, you can use the information to make smarter decisions on resource allocation and investments.
How to measure new hire values
Measuring value isn’t always easy, especially as different businesses have different views of what constitutes employee value.
Setting quantifiable and qualitative metrics
Some metrics can be easily quantified. Time to hire (the amount of time between advertising a vacancy and onboarding the new hire) and cost to hire are examples of quantifiable metrics. You can also look at the employee retention rate and first-year attrition rate.
If you’re using specific tools for recruitment and retention, such as an applicant tracking system or an HR app, then you can work out its ROI by measuring the impact on performance.
Although you can measure some performance aspects with numbers, such as productivity levels or targets, others are more subjective. You’ll need qualitative metrics to assess the quality of new hires—such as cultural fit and employee happiness—and to evaluate the candidate experience.
Forecasting long-term impacts
These metrics are useful for predicting the long-term ROI of your new hires. For example, if the quality of hire is high, you can expect maximum profitability and productivity. You can make decisions based on this information.
You can also use predictive analytics for hiring based on historical data and patterns among current employees. This helps recruiters to select candidates who are likely to be a good fit and make a positive impact.
Streamline your recruitment strategy
Calculating recruitment ROI helps you make sure that the value from each new hire justifies the money spent on hiring them. The evaluation process highlights areas for improvement so that you can optimize your recruitment strategy.
Once you know your ROI, you’ll be able to identify the recruiting and retention methods that work well and allocate more resources to these. This helps you make smarter investments that will enhance your HR efforts and bring more best-fit candidates to your door.