How Do You Measure Quality of Hire in a Full Employment Economy?

By Tom McGuire | November 28, 2018

Hiring during the most competitive talent marketplace in the last three decades is not for the faint of heart. When key skills are at a premium, companies have limited opportunities to attract and win top talent. Hiring tactics that worked ten years ago – even two years ago – simply don’t yield the results the business now demands. 

When talent acquisition is this difficult, a focus on filling the top of the funnel to increase the chance that someone will get hired is understandable. And while that might work in the short term, it’s the wrong approach. More candidates may improve the odds of hiring someone, but it’s not the best way to improve the odds of landing highly qualified candidates. The more time that hiring managers and talent acquisition professionals spend on managing candidate quantity, the less time they are able to spend on focusing on candidate quality from the top of the funnel down.

In these economic times, and in our knowledge economy, the focus of talent acquisition efforts must first be on quality of hire. This has become more than just a buzzword; it’s a key driver of business results.

In order to effectively measure quality of hire and understand how it can be improved, it is important for companies to identify exactly what quality of hire is – and what it is not. Many consider it to be how the hiring manager feels about the recruiting process, the recruiter’s performance, and the slate of candidates presented, rather than how the new hire actually performs on the job. This is flawed logic because, as anyone with recruiting experience knows, some hiring managers credit recruiters who play the role of an extra administrative assistant – while criticizing true “talent advisors” who attempt to guide the selection process. 

Others believe quality of hire can be determined simply by calculating retention of new hires within a period of time (typically between 90 days and one year.) Regardless of the time frame, retention does not correlate uniquely with quality of hire. Some of the poorest performers, after all, are known to stay employed longer than star players. 

The truth is that quality of hire is the level at which a new hire (whether an internal employee promoted to a new position or an external hire) produces value for the business over time. It cannot be detached from retention, as it assumes retention in the role (a new shift manager who leaves within one month or a systems engineer who leaves after one year – regardless of their reasons for doing so – can’t be considered a quality hire in this context) and takes into account key performance metrics over a period of time.

True quality of hire is a reason for, rather than reflection of, hiring manager satisfaction with recruiting.  

When companies measure quality of hire in this way, particularly for those in critical roles, they can identify talent acquisition processes and methods that lead to the most successful hires.  They can, for instance, identify sourcing and selection techniques which are most effective and then double-down on investment in those methods.

The need to improve quality of hire is a pressing one for many reasons, least of which is the estimated cost of replacing a bad hire (conservatively) at around 30 percent of an employee’s first year earnings.[1] Most important is that the vast majority of companies build business value through intellectual capital – e.g., the output of knowledge workers creating brands, proprietary technology and databases, patents, strategic customer relationships, and so on – via the exponential productivity that comes with higher quality, particularly when the work is complex[2]. This type of value is what our new economy is built on – and it’s created and maintained only by talent. When critical talent leaves, the value of such a business can measurably decrease.  Last, as the economy continues to improve and hiring is on the rise, turnover pressure will only increase as employees have the confidence and opportunity to look for more advantageous positions. This makes it more important than ever for companies to ensure they hire the right people, including right fit, when given the opportunity to do so, particularly into mission critical roles. 

The challenge for most organizations is determining which roles merit the tracking and measuring of quality of hire, how to measure it and then how to prove the business value of their investments in the talent acquisition function.  

Why Measure Quality of Hire?

At a time when HR teams have greater access than ever to information, it can be overwhelming and difficult to arrive at meaningful conclusions about talent strategies and how talent investments affect business results.  For example, without isolating clear-cut data to suggest which sources, techniques and backgrounds lead to the best hires into critical roles, talent acquisition teams are left with anecdotal evidence.  The variety of recruiting stakeholders – hiring managers, HR partners, senior leaders, and candidates themselves – presents another challenge, since all have different priorities and expectations. If talent acquisition efforts can’t be adequately measured and assessed, it’s impossible to explain or defend strategic priorities, trade-offs, outcomes and return on investment to various stakeholder groups.

For these reasons, the ability to measure quality of hire can provide the data talent acquisition teams need to not only continue hiring top candidates, but also showcase the results to the rest of the organization. Yet, there is a definite lack of information on this critical metric within most organizations. Companies that have a solid strategy in place for measuring quality of hire have much to gain. Recent research shows that 85 percent of companies that measure quality of hire believe doing so has a positive impact on hiring quality – ergo, what gets measured gets managed.  By focusing on quality of hire, organizations can better understand the strengths and future potential of their employees and identify the characteristics they should look for when hiring new talent.

Understanding How Talent Drives Business Value

First, it’s important the understand the formula for creating business value:  markets set a company’s business value based on reasonable projections of future cash flow driven by asset performance. There are two types of assets to consider: tangible assets (equipment, buildings, trucks, etc. – all of which companies report) and intangible assets (brands, customer relationships, IP, proprietary technology – none of which companies report in their financials, unless they sell or acquire another company). Our research[3] shows that over 90 percent of the value of leading companies is attributable to intangible assets, such as brands, proprietary data and software, IP, customer relations, etc. These assets that drive the vast majority of business value are created by nothing other than people.  It is an organization’s human capital that creates intellectual capital – the intangible assets, which can be thought of as the valuable accumulations of employees’ intellectual output over time.

To measure the value of talent acquisition investments in a particular organization, one must first understand how value is created (and will be created) within that specific business. For public companies, a review of public documents such as investor presentations and 10-Ks provides a solid baseline understanding.  It is easy to determine that for a company like Raytheon, a relatively small team of engineers creates the greatest amount of business value for the organization. For companies like Coca-Cola and Proctor & Gamble, it’s brand managers and product innovation professionals. For Merck, it’s the R&D team creating patentable new drugs. Great hires in these areas for these businesses will result in huge gains in business value.  Poor hires, on the flipside, will create great risk. For this reason alone, talent acquisition should be much more strategic with the prioritization and handling of requisitions.  Every req shouldn’t be treated equally nor should more time be spent on the oldest requisitions or those of the loudest hiring managers. Instead, TA should focus on over-investing in the attraction and selection of the talent that is most valuable to the business.

Almost all companies project the cliché that “our people are our greatest assets,” but how many back that reality up and manage it with measurable data? Not many.  In order to maximize human capital productivity – truly managing our “greatest assets” - one must look at the entire spectrum of talent practices - how people are hired, organized, managed, rewarded and engaged and, as a consequence, the value they provide.  In other words, measuring the total of how talent is managed. The very big picture is not just about the people, or simply hiring the right people. Intellectual capital is successfully created and sustained when a company acquires the right people and provides the right environment within which they can thrive - effectively organizing, leading, rewarding and retaining teams of people. Without strong leadership and organizations, the most talented employees will be stymied in their efforts to produce value-added work. 

Challenges in Measuring Quality of Hire

While maximizing business value depends on managing the entire spectrum of talent practices, it all begins with hiring – if quality of hire falls short, all people investment after that fact is sub-optimized.  So why don’t more companies measure quality of hire in the way we’ve discussed – or at all? These are the obstacles and objections we’ve heard from HR and Talent leaders over the years: 

• We can’t get leaders to agree on which jobs for which we should measure quality 
• We can’t get leaders to agree on how to measure quality
• The data is in different systems / it’s hard to get
• We can report on it – but then it will appear that poor quality of hire is our (TA / TM / HR) fault– when it’s really the managers’

Ultimately, the issue comes down to accountability; many organizations are simply unsure of who should bear the responsibility of measuring and acting on this. Should it be HR or talent acquisition? It’s a fair question since, after all, they are the ones who identify, engage and evaluate the talent put forward. On the other hand, few would suggest they are accountable for what happens after the hiring stage, when the ongoing management of those employees is clearly the responsibility of the manager.

When it comes to hiring managers, they often view quality of hire as whether or not they’re pleased with the candidates presented to them. When pressed, they will often state that they felt pressured to hire the best candidate presented by talent acquisition – not the best candidate. Many managers consider turnover rates, performance and cultural fit as a reflection of hiring quality.[4] This is ironic considering that many employees quit specifically because of their manager.

Measuring quality of hire involves much more than just the hiring process or how long the employee stays in their new role. As previously mentioned, it should be seen as a measure of how the individual performs over time.  The question of accountability – who should be recognized or penalized when quality of hire is poor – is moot. Rather than deciding on which group to “assign” such a metric to (and potentially punish for), the first step is to begin tracking it.  

Quality of hire data can be hard to identify. That’s why it’s important to begin with a few roles that are clearly most critical to building future business value.

So, what can organizations do to start the process? Instead of trying to measure quality of hire for all employees across the organization, a reasonable first step is to begin measuring a segment of the organization that drives the greatest business value, like engineers in our Raytheon example. Also crucial is understanding that quality of hire should never be subjective – the fact that a manager is happy with the recruiter assigned to him or satisfied when his employees don’t quit doesn’t correlate with the creation of business value over time. Instead, it should be based on specific data points that indicate current and projected productivity among those employees. In many companies, these would be:

1. Retention– The length of time an employee has been with the company is a ticket to measuring quality of hire, as the employee should be in place at least two years to begin to understand they value they bring.  If an employee quits (for any reason), there is nothing more to measure.
2. Performance ratings– Performance ratings are a critical data point for measuring employees.  Even when such processes and ratings are imperfect, they are likely imperfect throughout the organization, thus creating a generally fair apples-to-apples calibration of talent.  
3. Potential ratings– Assessments of potential success in advanced positions in another valuable data point when striving to measure quality of talent over time.
4. Promotion history – Understanding how an employee has progressed in terms of promotion and salary history within the organization will provide yet another data point about the value they contribute to the organization.

The power in these factors is their combined value, as an “index”, rather than their stand-alone relevance as individual indicator.[5]

There may be additional business-based data points available for particular roles that would be valuable to consider – such as P&L results, new product launch metrics, net promoter scores, etc. For greatest success, the right few talent metrics most indicative of quality of hire in a particular role, and how to measure them, should be identified and agreed upon by senior leaders.

By analyzing numerous metrics and involving multiple parties, the organization can have a fuller picture and better understanding of their quality of hire. But many companies still struggle to get to this state and may rely too heavily on one metric – such as sales revenue. This only tells one side of the story; additional objective data points are needed. Without doing this, a company won’t fully understand what defines success and leverage this information to hire more high-performing talent in the future.

Who’s Responsible for Quality of Hire?

To create an effective strategy for measuring quality of hire, measurement should come before discussions about accountability. Debating who should be responsible, how they should be held accountable and consequences for good or bad results can derail the more important conversation.  Most critical is:

• How can quality of hire be measured in our organization?
• What is the value this measurement can bring?
• How can the measurement be sustained over time?
• What actions will we take based on the data?
• In what areas of the organization should we begin tracking quality of hire?

In many companies, efforts to track quality of hire derail at the beginning – with talent acquisition – for whom it is assumed is “most responsible” for such a metric (the “hire” in “quality of hire” is probably a misnomer). Understandably, Talent Acquisition is often reluctant to focus on this metric because they can’t be responsible for other factors outside their control or things that happen after the onboarding stage. But this isn’t the place that such discussions should begin – given how much is at stake for the business if the results are good versus poor. Therefore, support must come from the top, ideally prompted by a team from both HR and Finance. 

Don’t let questions about who’s “responsible” for quality of hire derail efforts to begin measuring it for a few critical roles.

Only after these discussions take place, agreement is gained, and the measurement method is defined, implemented and evaluated, should the aspect of accountability enter the conversation. Once in place, and results are reviewed over a period of quarters, then accountability for different aspects of quality can be assessed and assigned. Of course, the best measures are those of importance to senior leaders in the company, so we begin there. Following that, aspects of quality accountability should be assigned to hiring managers, HR (specifically talent acquisition, talent management and HR generalists) and other stakeholders in the process.

An example of an essential slice of quality of hire that talent acquisition should be held accountable for is source of hire. Based on quality results, an assessment should be made by talent acquisition relative to what are the most effective sources, and which are least effective. Over-investing in the best sources, for the right hires, and reporting on the results, is the responsibility of talent acquisition. 

Strategies for Improving Quality of Hire

Once the company determines which metrics are most important for quality of hire and who is responsible for what, the next step is to put those plans into action. During our discussion, our group of talent acquisition leaders opened up about the methods they have used to not only measure quality of hire, but actively work to improve it. Some of these strategies include:

Recognize the competencies of top employees to hire candidates with similar traits:

“We don’t just do competency-based interviews alone, but we also examine ‘attributes’ on how employees are hard wired. We had a consultant come in and figure out why people stayed and identified those items to roll into interview questions. So, we can use this insight as a predictive tool for new hires.”

Get everyone on the same page:

“Everyone needs to understand what good looks like – or we’re all coming from different perspectives and we’ll never get there together.” 

Take a closer look at the way talent is evaluated within the organization:

“To perform effective talent management, we rely on performance ratings and potential ratings and we gain insight into the preferences of the individual and understand when they will be ready to advance internally.  We are constantly trying to get better at this.”

Figure out how to prioritize the work and over-invest in the right talent:

“Years ago, the most critical jobs would be tied to revenue. But our thinking has evolved – and we’re connecting those jobs to intellectual capital, not just revenue. There is a nuance on figuring out where to invest.”

Understand that quality of hire varies for different groups:

“Quality measures and time horizons are very different, so measuring quality is hard, because we have new hires that won’t be with us for longer than two years. Measuring quality of hire for retail versus engineers is very different. The approach has to be different for different populations. You have to address each appropriately and then provide that data to leadership in the right way. You have to adapt based on your industry but also the specifics of your company. We can all learn from each other, but likely don’t want to replicate the same processes.”

Tying Quality of Hire to Business Success

When companies understand the components of a good hire, they can continue hiring to that same (or better) level and work to ensure their best talent is retained. The challenge lies in measuring quality of hire and determining who is responsible for it. Rather than just being considered a metric that indicates the success of talent acquisition, quality of hire should be based on business value delivered through intellectual capital. And instead of being relegated to one team, senior leaders, HR, talent management, talent acquisition, and front-line leaders should all play a part in measuring, managing and improving quality of hire.

As talent increasingly serves as the biggest differentiator, the ability to understand how people contribute to organizational success is essential to maintaining competitive advantage. By identifying what makes them successful on the job, a company can continue hiring individuals who have the greatest likelihood of succeeding. This insight is essential to creating – and sustaining – a high-performing organization.

 

Make It Happen in Your Organization

The hardest part is getting started. Contact us and talk to an expert about measuring quality of hire in your organization. You may also want to download our Recruiter Workload Calculator.

 

END NOTES:

[1] "The Unexpectedly High Cost of a Bad Hire" LinkedIn, Ryan Holmes, July 16, 2013.

[2] "Individual Differences in Output Variability as a Function of Job Complexity", Journal of Applied Psychology, 1990

[3] Intellectual Capital Index, Talent Growth Advisors, 2017.

[4] "The Holy Grail of Recruiting: How to Measure Quality of Hire," SHRM, 2015.

[5] Talent Valuation: Accelerate Market Capitalization Through Your Most Important Asset, Figure 7.4, Pearson 2015.

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