Knowing when to make a hire is one of the hardest decisions a business owner ever has to make.
It can make or break your business.
And too many don’t think deeply enough about it.
Today, I give you 4 things to consider when making a hiring decision.
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The art of hiring: Knowing when to make hire
In July 2019, my beloved Thunder traded our franchise player, Russell Westbrook. I was shook.
There had been rumors it might happen, but you can never be fully prepared. If you get the sense I was upset about it, you’d be right. Yes, he was flawed. But he wanted to be here.
Russell was traded to the Houston Rockets, where he’d pair with former teammate and fellow MVP, James Harden (one of those who didn’t want to be here).
Because of their previous on-the-court partnership in OKC and their exceptional talent, many thought this made the Rockets a title contender.
But, the signs of potential trouble were there before it began.
Westbrook and James are both ball-dominate players, at the time being 2 of the top 4 in touches per game.
Both players were emotional and passionate, wearing their emotions on their sleeves.
Chris Paul, who Russell was traded for, had demanded a trade because of ongoing conflict with James Harden.
The trade clearly didn’t work out as planned. The Rockets lost in the 2nd round of the playoffs and Russell Westbrook was traded in the offseason to the Washington Wizards.
Personal conflict, as well as leadership’s mismanagement of it, led to a loss of draft picks, players, an opportunity at a championship, and so much more.
Hiring decisions are important.
But they’re hard.
James Harden and Russell Westbrook had been friends as children. Who would have guessed they’d turn on each other?
They’re also expensive. In time, in actual cost, and in company morale (chemistry).
So, how do we know when it’s time to hire a new position?
When is the cost (time, dollars, and chemistry) worth it?
I like to look at 4 elements when breaking down the wholeistic cost of a new hire:
- Analyze the cost
- Measure the current workload
- Calculate return on investment
- Intangible benefits/costs
Let’s dive in.
Analyze the cost
The cost of a new hire is the first thing you need to understand. While this may seem simple, it’s anything but.
First, there is establishing a salary range and many people fail right here. To get an appropriate range, you need to know what you want the person to do.
To come up with a good description:
- Brainstorm all items, big and small, the position would do
- Look up job descriptions of similar positions
- Narrow both to the most important items
From there, you can narrow in exactly the title and years of experience needed.
After this process, you should an ideal salary for the position.
Next, you want to start thinking through all the other potential costs.
- Recruiting costs. The only way to avoid cost related to filling the position is to hire based on network only. Otherwise, you have to hire a recruiter or pay for job boards. This can get expensive, as a recruiter can be 20% of first year’s salary.
- Employee benefits. Benefits are expensive and seem to get moreso every year. A simple rule of thumb is to charge 30% more than the salary for benefit-cost (Salary x 1.30).
- Training and onboarding. New employees always have a learning curve. While some employees don’t need special training, all employees have onboarding expenses. Between software, computers, and office supplies, these can add up quickly. So many undershoot how much these things cost.
- Time cost for all involved. When doing this exercise, I’ve heard more than once “but we don’t bill our time.” Correct, but it’s time away from other tasks and time that adds stress to employee lives. Take the hourly rate of each employee involved and multiply it by 2 to get a bill rate. Then, estimate the time at each phase: recruiting, interviewing, training, “up to speed” time, etc. While they’re not “real” costs, this is often a sobering number that helps you and your employees take the process more seriously. Who wants to waste that time with a bad hire?
Even though we have full cost, our work is not done. You have to ask: can I afford it?
For me, when looking at afford, I ask: does it take me below my short-term and/or long-term profit margin targets?
If it doesn’t, it’s “affordable.” If it does, I look at ROI below and how much revenue they can “bring in.”
That’s enough for now, let’s move onto the current employee workload.
Measure current workload
With every new position, there is a combination of current tasks and new tasks that they’ll be taking on.
To avoid conflict or issues within the team, you have to understand how the new position will impact their workload and day-to-day lives at work.
The dichotomy is always when to hire. Too late and employees leave because of stress. Too early and employees leave because they’re bored.
When you see missed deadlines, overtime increases, or unusual turnover, it’s a sure sign you’ve potentially waited too long to hire.
To get this right, you have to understand the stress levels of your employees. You can’t do this without knowing them and talking to them.
A few more things you should consider are:
- What future work, because of growth or changes in the business, could be added to current employees load? Or created?
- How would creating the position impact current employees work? What would they be able to do that they weren’t before? How would this impact their happiness at work?
- How would a new hire fill in a skill gap of current employees? Is it a gap current employees eventually fill or will it have to come from the outside?
This is a really difficult one because no formula can get to the bottom of feelings and cultural impact.
But by asking the right questions, you can get a feel.
The feel, while it may not be the deciding factor, could be the factor that tips a “tied” cost versus ROI argument.
Calculate return on investment
ROI is a little bit tricky. It seems simple on the surface, but the devil is in the assumptions.
Starting, to get an ROI, we want to compare cost of the employee against expected productivity. For sales this is easy, as input leads straight to output.
But, the details are messy for other types of roles.
Think: by them doing this, what will it free up other employees to do? If an admin employee frees up a marketer to send out X more emails, what does that equate to in revenue?
Look for secondary and tertiary effects.
ROI = (Expected Productivity - Cost) / Cost
But, we’ve made a lot of assumptions to get here.
To expand your mind a little more, ask these questions as well:
- What would need to be true for the employee to cover their cost?
- What would need to be true for the employee to make the company money?
- What is the optimistic scenario? What is the pessimistic scenario?
Questions 1 & 2 force you to break out of the “I can’t” attitude and think from a different perspective.
Question 3 forces you to do scenario planning and question the assumptions you’ve made.
I’m not trying to claim this will be perfect, but it will be 1000x better than what you’ve done before.
Intangible benefits and/or costs
We’ve covered quite a lot to this point. I bet more than the Houston Rockets did when bringing in Russell Westbrook… but we’re going to go one step further.
What other things could we be missing?
- How will the new hire impact your company culture? If hiring HR and you’ve never had HR, it surely will. Think about each connected position and how it will change their day-to-day.
- What new possibilities does it create? Could hiring the new role bring other benefits, outside the pure job description?
- What new capabilities does it provide? If you’re getting stronger in marketing, it could impact the other areas of business as they get better at marketing by seeing them work.
- How does this fit into your larger plan? Honestly, this took too long to mention. If you need a center but you’re “hiring” a point guard when you already have one, that might not be right for the long-term plan.
Each decision you make today impacts the future trajectory.
I don’t say this to create paralysis. I say this so you’ll think through the scenarios.
Bringing it together
Now, 2 of 4 are non-measurable things. You must be thinking… how do we bring these all together?
The truth is… we can’t from a numbers perspective.
But, this analysis puts you waaaay further ahead than you would be otherwise.
The measurable items create roadblocks that stop you before the deeper, less clear, decisions.
If cost is unaffordable, you can’t make the hire.
If ROI doesn’t align with our goals, you can’t make the hire.
At this point, you have to switch to feel and risk tolerance.
If your fundamentals are good (2+ months of cash in a stable industry), then risk tolerance should be higher. But if fundamentals are already shaky, you should act with more caution.
I’m sorry, I didn’t answer your question. But if you do this analysis, I think you’ll answer it for yourself.
What should I write next?
Last week working capital won in a route, so look for that next week.
- The economics of staying focused
- Knowing when (and when not) to take on an investor
- X reasons to increase your price & stop undercharging TODAY
- Processes for controlling costs in your business
- The cost of an inefficient business
- The cost of the wrong team
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Something Interesting
- How do you get the best returns when investing? By having a long-term mindset. Each Wednesday Brian Feroldi’s newsletter “Long-Term Mindset” shares 5 timeless pieces of content that encourage long-term thinking. Join 50,000+ today.
- I got some feedback last week that I should have used an example and you were right… so I tried to “right” it by writing a Twitter thread on cash flow and I used Home Depot as an example. You can check that out by clicking here.
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-Kurtis
