The ROI of Behavioral Interviewing
There is a very clear return on investment for implementing behavioral interviewing. People intuitively know that improving the quality of your hires and reducing replacement costs and unwanted turnover are high value propositions. However, in this article, I will try to provide a very conservative estimate of the magnitude of the return. I will be using the following two equations:
- Value of Structured Interviewing = Improved Quality of Hire + Reduction in Costs Associated with Bad Hires
- ROI = (Value of Structured Interviewing – Total Implementation Costs/Total Implementation Costs) x 100
Cost of a Bad Hire
Let’s start with the calculation of the cost of a bad hire. Every time a bad hire is made and results in the individual exiting the organization, there will be replacement costs, training and onboarding costs, as well as a host of intangible costs. The components of the cost structure are as follows:
Replacement direct hiring costs
- Advertising costs – Costs associated with advertising the position on various sites or venues
- Travel related expenses – Costs associated with bringing in out of town candidates for open positions
- Relocation costs – Costs associated with relocating key hires from other locations
- Recruiter fees – Costs associate with utilizing retained or contingency search firms for difficult to fill positions
Replacement indirect hiring costs (inefficiencies)
- Recruiter time – Costs associated with the time spent by internal recruiters to find other candidates
- Interviewer time – Costs associated with the time spent by interviewers to evaluate additional candidates and make another hiring decision
- Training/onboarding costs – Costs associated with the time spent providing replacement hires with appropriate orientation and training
Intangible & other potential costs
- Lost productivity – Costs of less than acceptable performance and productivity by the bad hire plus lost productivity during the time it takes to find a replacement and get them up to speed
- Worker overload for co-workers – Costs of overburdening existing staff, reducing engagement, and increasing risk of additional turnover
- Negative impact on customers – Costs associated with potential damage created by the bad hire on customers, jeopardizing client retention.
- Severance costs – Costs associated with worker compensation or severance payments for the bad hire
Research by Right Management suggested replacement costs could run between one and five times annual salary depending on the position. ADP estimated replacement costs for a $30,000 a year salaried employee to be about 1.7 times their annual salary. These estimates would suggest ROI for reducing unwanted turnover would be huge. However, for our conservative calculation of ROI, we will only consider out of pocket costs which result in direct savings to the bottom line.
Value of Improved Quality of Hire
There are various ways to examine the value of improved quality of hire. For our purposes, we will look at the value in terms of increasing hiring success rates. This analysis considers three parameters:
- Incremental validity – Validity refers to the predictive power of a selection tool. It is expressed as the correlation between performance on the selection tool and subsequent on the job performance. Incremental validity is the difference between the validity of behavioral interviewing and the validity of current selection tools being used. The higher the incremental validity, the greater the impact on improving hiring success rates.
- Base rate – Base rate refers to the percentage of hires that are deemed to be successful. The lower the base rate, the greater the likelihood of making significant improvements in success rates by introducing a more valid selection tool.
- Selection ratio – The selection ratio refers to how many candidates were evaluated for the position. If ten candidates were evaluated to arrive at one hire, the selection ratio would be .10. The greater the number of candidates for a position, the greater the likelihood of increasing hiring success rates (e.g., if you routinely hired 9 out of every ten candidates, better selection tools would have little impact).
These three parameters can be plugged into a well-known table referred to as Taylor-Russell Expectancy Tables to arrive at an accurate estimate of likely hiring success rate associated with a given scenario.
To calculate ROI for structured interviewing, we will use the following assumptions:
- Incremental validity = .50 – The difference between behavioral interviewing and traditional unstructured interviews according to research is in this magnitude.
- Base rate = .70 – If traditional unstructured interviews are being used as the primary selection tool with a validity little better than flipping a coin, an organization could easily see 30% of their hires not succeed.
- Selection ratio = .10 – This assumes ten candidates are evaluated to fill one position on average. In today’s economy, that is a very valid assumption.
- 200 hires in a year – Not an unreasonable number for an organization of 2000 employees or more.
- Average salary = $40,000 – Roughly the average yearly income for employees in the private sector in the US.
- Direct out of pocket replacement expenses = $2000 – Reasonable per replacement estimate considering a single advertisement costs on average about $550. Relocation costs could easily run $8,000 and a very conservative estimate would be that only 4% of filled positions required relocation. This estimate does not count severance or retained search fees.
Plugging the incremental validity, base rate, and selection ratio into the Taylor-Russell Expectancy Tables indicates an organization could expect a hiring success rate of 94% which is a 24% increase in success rate compared to the 70% initial. A 24% increase in success would mean replacement cost savings for 48 hires. At $2000 per bad hire, this results in a value contribution of $96,000.
The costs of implementing behavioral interviewing in an organization of 2000 employees would roughly be about $20,000 (including interview management software and interviewer training). Plugging these values into the ROI calculation yields:
ROI = (($96,000 – $20,000)/$20,000) x 100 or 380% return on investment!
Past estimates of ROI have produced very large ratios due to calculating the value contribution in a way that included productivity and efficiency values that do not really directly impact the bottom line. This estimate only included replacement cost savings that would drop to the bottom. Even following this highly conservative approach yielded a considerable return on investment underlining the compelling rationale for implementing behavioral interviewing across the organization.