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The Impact of ELTV on the Cost of Hiring an Employee

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Written by

Kerry Wang

CEO, Co-Founder

Published

July 31, 2020 7:27 PM

Categories

Best Practices

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Most of us have been in a situation where we need more team members but have to “sing for our supper” to get the headcount.

In business, growth often means good. Yet, it gets costly when a company tries to grow too fast without a clear ROI. 

Human resources has now become People Practices. This stems from the belief that people-focused hiring activities are more profitable. Strengthening the recruiting and onboarding process means a healthy return on employee performance. It’s a win-win.

Today I'll cover the four main factors that affect the cost of hiring an employee and the ways we can maximize ROI. Let's start with Maia Josebachvili's ELTV (Employee Lifetime Value) model that measures contribution.

Why Employee Lifetime Value Matters

In the 2017 Talent Acquisition Benchmarking report, SHRM found that the average cost-per-hire in 2016 was $4,425. The longer employees stay, the greater the profit payoff becomes. 

Maia's case study confirms that "the difference between average and slightly optimized People Practices for one salesperson over the course of three years is $1,300,000 in net revenue, or a 2.5x difference for the organization.” Investing in better onboarding and management practices increases talent retention and profit.

Monitoring ELTV data leads to providing a stronger path for new hires which can translate to quicker ramp-up time and a stronger cultural connection and retention.

Four Factors That Influence ELTV

Maia defines ELTV as the value that a new employee carries with them within a company up until their last day. 

Using the ELTV metric measures employee contributions over time and quantifies their ROI.

New hires start their first day with the burden of costs of their hire counting against their ELTV. Using the ELTV metric and enhancing People Practices increases their value quicker.

We can increase the ELTV by investing in these four main People Practice categories:

1. Hiring 

A report by BCG states that “companies that are highly capable in 22 key HR topics consistently enjoyed better economic performance than those less capable. In several topics, this correlation was striking — up to 3.5 times the revenue growth and as much as 2.1 times the average profit margin.” 

Top talent will attract quality employee referrals during their lifecycle within the organization. This supports net profit.

It's not always obvious who the quality hires are — that's how Searchlight can help.

Searchlight helps to identify top performers by using aggregated reference data. The most predictive insights are from people who have worked with them before. It's these quality hires that are most likely to increase your ROI.

2. Onboarding 

A high-quality onboarding program can lead to shorter ramp-up time. 

This means that the individual employee can become a contributing member sooner which increases their total net value. A solid onboarding process also provides a better employee experience which can translate to employee retention. 

3. Management and Development

Employee retention depends heavily on management's ability to provide development opportunities. Improper management or a lack of upward mobility within the organization can lead to employee turnover. This is incredibly costly, time-consuming, and ultimately counterproductive. Each time an employee leaves it costs the team in both productivity and morale. 

4. Management Practices and Culture

A positive culture is directly linked to a longer employee lifecycle. 

Don't forget that it's not all gym memberships, free lunches, and sky-high salary ranges that qualify this either. There are a whole host of employee benefits like work-life balance, a safe feedback culture, and purpose-driven work that can lead to longevity and employee retention. It's these critical factors that undoubtedly boost the bottom line.

The True Cost of Hiring an Employee

Cost of hiring an employee

We know which People Practice categories have a greater likelihood of increasing value. Now let's look closer at calculating the cost of a hire.

Here’s the formula:

(Total cost internal costs + external recruiting costs) ÷ total of number of employees 

Some examples of internal costs include:

  • Human resources and/or recruiter salaries
  • Rent
  • Hardware (phones, computers, printers)
  • Software (Applicant Tracking System)
  • Onboarding and training

Some examples of external costs include:

  • Recruiting costs (external agencies)
  • Advertising and marketing
  • Pre-employment screening (background checks)
  • Technical assessments
  • Travel and relocation expenses
  • Payroll taxes
  • Benefits (health insurance, paid time off, retirement planning)
  • Workers’ compensation
  • Payroll administrative costs

Of course, not every small business is going to match this list. Here's an example of how cost per hire is affected when more people are hired.

Here they are spending $15,000 total recruiting budget on five hires. The cost per hire is $5,000.

(10,000 + 15,000) ÷ 5 = $5,000

If they decide to hire eight people, the cost goes down.

(10,000 + 15, 000) ÷ 8  = $3,125

Automation as a Cost-Saving Tool

It seems like a Catch-22 that hiring is such a critical step in increasing employee ROI but is also an incredibly costly process when all is said and done. That's where automation comes in.

Optimizing aspects of your hiring process can prove to be timesaving and alleviate some of the associated costs externally. It can be empowering to your hiring team to rely on automated technologies. Several technologies integrate seamlessly with popular ATS (Applicant Tracking Systems) and provide you with direct access to candidates without having to change much on the backend. 

For example, using Searchlight as a hiring platform means that you're getting access to vetted, quality candidates. Candidates are delivered to you based on qualified data points that match key behaviors, team fit, and coachable areas. 

You can reinvest the time you saved hiring into planning an onboarding strategy by knowing coachable areas first. This increases ramp-up time and translates to a bottom-line boost much sooner.

Bringing ELTV Full Circle

Cost of hiring an employee: Group talking and laughing together

Many organizations understand the value of growing their team but few understand the ongoing value in investing in People Practices. By investing in onboarding, hiring, talent development, and culture, you create a cyclical approach to talent retention and get a solid ROI on employee lifetime value.

Learn how automating one aspect of your hiring process in a non-disruptive way can decrease recruiting costs and set new hires up for success — it only stands to benefit net profit. 

Use the ELTV model to create a strong workplace culture where your top talent wants to continue to hang their hat for years to come.

Further Reading

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