This week we demonstrate how to apply Return on Investment to valid methods of recruitment, in order to help make strategic and effective decisions about the hiring process.
What is the profit? This is a core question for any business. Important investments are weighed against projected incomes, especially when the costs are substantial and the expected returns are key drivers of the company turnover.
Hiring processes should be considered in this way. It is common knowledge that people are key drivers of creating value in organisations, especially in the thought-driven, interconnected era of today.
In support of a seminar I presented at the AGR Student Recruitment Conference on Thursday 23rd June 2016, this blog post will show you how to estimate the Return on Investment (ROI) of using valid methods for hiring decisions. I’ll use a specific example, but I urge you to use numbers from your company to make calculations of your own.
I’m using a new web-app that you can access for free here: https://psychometrics.shinyapps.io/utility
In this example, company Y is hiring on average 10 junior software developers per year, with about 20 applicants per process. They want to find people with the potential to excel and advance in their career within company Y.
To improve their hiring process, they’ve been advised to use a valid cognitive ability test. They want to let all applicants complete the test online, and then select the top 5 to meet for interviews. The final hiring decision will then be based on test results and impressions from the interview.
On a yearly basis, they have 200 applicants for 10 positions. Assuming that 30% of the applicants would have been successful if they had been offered the job, and that the predictive validity of the process is 0.65 (the predictive validity for cognitive ability tests for success in medium complexity jobs is 0.66 according to Hunter, Schmidt, and Le, 2006), company Y would have a 84.7% chance of hiring successful people.
Pull the sliders and enter these values to get the output below:
This can be translated into economic terms by ticking the box “Calculate Return On Investment”. If the hired junior software developers earn €30,000 per year, stay for 1 year and the test costs are €50 per candidate, the expected ROI is €155,892 for one year.
This is due to a higher than average productivity in the hired group, an increased chance of finding top performers and a reduced number of bad hires in the long run.
This app can be used to make strategic decisions about hiring processes. Fine tuning the process to get a higher predictive validity does result in better chances of finding the right people, and in turn this produces results on the bottom line.
More details about the calculations can be found at: https://psychometrics.shinyapps.io/utility
We conducted a seminar about this topic at the AGR Student Recruitment Conference on 23rd June 2016.
Contact TalentLens on 0845 630 8888 (calls cost 3p per minute plus your phone company's access charge) or firstname.lastname@example.org about valid hiring processes.
View a previous post about Effectiveness vs. Popularity of recruitment methods
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