How do you measure the return on investment (ROI) of an employee selection process? This is one of the most common questions that we are asked by our clients, and in turn, one that is asked of HR professionals by their executives. Based on our experience, our own research and the research of many others, we feel that there isn't a single answer to the question. In fact, we contend that there are 5 key factors directly related to the ROI of the selection process:
1. Increased Productivity and Quality
This is the most common way of thinking about ROI. It answers the core question: Do the people you hire with this system perform better on the job?
Most of the utility calculations used by Industrial/Organizational Psychologists are directed at this part of the ROI equation. We know that the more accurate a selection process is, the higher the probability of hiring better employees. The accuracy of a test or selection process is referred to as its validity and is measured in terms of the correlation between the scores on the test and actual job performance.
2. Reduced Turnover and Absenteeism
There is no doubt that turnover occurs for many reasons. Improving the selection process will not completely eliminate turnover. However, a significant portion of early tenure turnover can be attributed to poor job fit, which can be affected by an improved selection process. A process that aggressively focuses on screening for motivational fit and on identifying individuals with a higher risk of turnover can reduce turnover anywhere from 5%-60%.
3. Reduced Risk of Legal Challenges
Simply put, having a well designed, well documented and job-related hiring process is the single best way to avoid - or at least deter - costly lawsuits brought against your organization related to the hiring process. Over the past 15 years, we’ve worked with a number of organizations that have either had a past history of or have been part of class-action lawsuits related to discrimination in the hiring process. In every case, a structured, well thought out, accurate, fair and job-related hiring process allowed them to successfully defend the lawsuit without going to court or to serve as a remedy to a previous adverse decision.
Creating a legally defensible selection process is consistent in all ways with achieving the other goals discussed in this article. It helps organizations hire people who are more productive, make fewer mistakes, stay with the company longer and cause fewer accidents. It also saves millions of dollars in legal fees.
4. Reduced Risk of Aberrant Behaviors
Some employees engage in activities unacceptable to employers. These are often called aberrant behaviors. They involve things such as safety violations, workforce violence, drug use, theft and fraudulent worker’s compensation claims. These types of behaviors tend to follow the 80/20 rule, in that 80% of all problems are created by 20% of employees. In reality, it’s probably closer to 90/10. There are a number of tools available that accurately flag high-risk individuals. It’s not that there is a single trait that characterizes people who engage in these activities, however, there are patterns of behavior and definable profiles that tend to be associated with these types of individuals.
5. Improved Resource Utilization
How much time do your managers spend interviewing job candidates? It is important that managers be involved in the hiring process, but bringing them in too early unnecessarily wastes their time.
One of the goals we set for the organizations we work with is that, for entry-level positions, managers should be able to make job offers to 65% of the candidates they interview. For higher level positions, the percentage drops somewhat. Does this mean that we recommend that our clients lower their standards and hire almost everyone with whom they talk? On the contrary, we recommend raising the standards by doing a better job of screening candidates before they ever get to the hiring manager.
Any time you evaluate the true value or ROI of a selection process, it’s important to look at it from different angles. I’ve listed 5 factors that we feel are essential to consider whenever you compare the value of alternative selection processes. Your individual circumstances will determine how much weight to put on each of these factors. Keep in mind though, these 5 areas are not mutually exclusive. A good selection process should receive high scores in each of the 5 areas. You don’t have to compromise one in order to improve another.