More and more frequently, decision-makers considering outsourcing recruitment ask how to calculate the return on investment associated with hiring a new manager (ROI in Executive Recruitment). This becomes even more challenging and crucial when executive-level recruitment is involved.
1. Definition of ROI
Recruitment ROI, specifically in executive search, refers to the financial assessment of the benefits of investing in the recruitment process for high-level executive positions. It is a metric that demonstrates how much a company gains compared to the costs incurred, such as recruitment fees, the time required to fill the position, and the costs of integrating a newly hired leader into the organization.
2. Factors Impacting ROI in Executive Recruitment
Both the costs and the gains from hiring influence ROI. Key elements that must be considered when calculating ROI include:
- Cost per Hire: This includes direct costs such as the labour cost of the company’s own employee(s) assigned to carry out the recruitment, fees for recruitment agencies, and advertising, as well as indirect costs such as lost productivity during the vacancy, training costs, onboarding costs, and other relevant expenses, if applicable.
- Time to Fill: The exact number of days needed from when a position becomes vacant, through the creation and posting of a new job opening, until an offer is made and accepted by the candidate, and finally, when the new employee starts working. In the case of lower-level positions, for simplicity, the endpoint for calculations is often considered to be the moment the candidate accepts the offer. Many companies adjust these data following their internal procedures and policies. A longer time to fill a position results in losses due to reduced productivity. Reducing this time through an efficient recruitment process improves ROI.
- Quality of Hire: Quality of hire is a metric used to evaluate the effectiveness of a recruitment process by assessing the performance and contribution of new employees after they are hired. It focuses on measuring how well a new hire fits within the organization and how they perform in their role.
3. Long-Term Benefits of Executive Search
Hiring for executive positions has a long-term impact on the organization. Research shows that successful recruitment for key roles:
- Boosts Productivity: Leaders directly influence the performance of teams and the organization, which can translate into increased revenue.
- Reduces Turnover Costs: A well-selected leader is less likely to leave the company, reducing the costs of subsequent recruitment processes and onboarding.
- Strengthens Competitive Position: Effective leaders can drive innovation and strategic change, providing the company with a competitive advantage.
4. Methods for Calculating ROI
The ROI of an executive search can be calculated using the following formula:
ROI = ((Gains − Costs) / Costs) × 100
Where:
- Gains represent the value the newly hired leader brings to the company, such as increased productivity, operational profit, or savings from reduced employee turnover.
- Costs represent the total cost of the recruitment process, including agency fees, time spent on recruitment, and the time required for the leader to integrate into the company structure fully.
5. Additional ROI Indicators in Executive Recruitment
Some publications suggest considering intangible benefits in the executive search process, such as:
- Enhanced employer branding.
- Increased customer and employee satisfaction.
- Strengthened client relationships through strategic decisions made by leaders.
Comparison of ROI: Executive Search Agency vs. Internal HR Department
A comparison of ROI in executive recruitment using an executive search agency versus an internal HR department involves several key aspects:
1. Time Required for the Recruitment Process:
Executive Search Agency: Agencies have established processes for developing search strategies and reaching the right candidates, often those who are passive in the market. They have experience in building trust with candidates, opening them up to new opportunities, and, most importantly, they specialize in recruiting for roles that are rarely activated within individual companies (such as CFO, Supply Chain Director, CEO, CSO, CPO, CHRO, BUD, General Manager, Chief Accountant, Production Director, board members and more). This allows them to initiate and conduct recruitment faster, especially when reaching passive candidates (those not actively looking for work but who may be the perfect fit). The time required is usually shorter than the process run by an internal HR department, which may be stretched thin by multiple responsibilities and unable to dedicate full attention to a single recruitment. This results in faster placement of the position and minimizes costs associated with the vacancy.
Internal HR Department: Internal HR often has to create a recruitment strategy from scratch, which takes more time. An HR recruiter must balance the recruitment process with other daily responsibilities, extending the time needed for each stage, from candidate selection to managing the process. Additionally, lacking specialized knowledge in reaching passive candidates within a specific business area or market segment can significantly prolong the process.
2. Recruitment Costs:
Executive Search Agency: Fees for executive search services are typically higher than internal recruitment costs. Agencies may charge a percentage of the hired individual’s annual salary (often between 20% and 33%) as compensation for their services. However, this cost covers the entire process—from candidate sourcing and interviews to final selection and reference checks, and may even include assessment centre costs.
Internal HR Department: Internal recruitment may appear cheaper at first glance, as it avoids the high fees of an agency. However, indirect costs, such as advertising expenses, the time spent by a recruiter who must divide their attention between various tasks, and maintaining candidate engagement throughout a typically multi-stage process, along with the costs resulting from the extended vacancy period, can significantly increase the total recruitment costs.
3. Candidate Quality:
Executive Search Agency: Agencies have broad access to global talent pools and often specialize in reaching leaders who are passive in the job market—those not actively seeking employment but who are ideal candidates for executive positions. Their extensive networks and industry expertise enable precise candidate selection, which can result in higher-quality leadership hires.
Internal HR Department: Internal HR, unless equipped with a specialized team, may have limited resources and networks, making it more difficult to reach top candidates and convince them to join the recruitment process. They typically rely on traditional methods, such as job postings, which may not attract the best leaders in the market. Moreover, the limited experience of an internal HR department in conducting recruitment and reaching executive-level candidates can lead to hiring an unsuitable candidate, resulting in additional turnover costs.
4. Confidentiality of the Process:
Executive Search Agency: Professional agencies have experience handling confidential recruitment processes, which is crucial when hiring for senior positions, especially when the hiring involves changing the leader within an organization.
Internal HR Department: Internal recruitment often involves challenges maintaining complete confidentiality, especially in larger organizations where employees may become aware of the ongoing process. This can affect team morale or the trust of current leaders. Additionally, candidates are sensitive to this aspect of the process and may respond cautiously to inquiries from another employer.
5. Process Management and Employer Branding:
Executive Search Agency: Agencies ensure complete professionalism and maintain a positive company image in the eyes of candidates. Each stage is managed according to the highest standards, which helps build the employer brand and attract top talent.
Internal HR Department: Managing multiple process stages, including candidate outreach and coordinating interviews, can be more challenging for internal HR departments, especially when recruiters have other responsibilities. Neglecting any of these areas may result in candidates’ negative perceptions of the company, which can affect its reputation in the market.
6. Guarantee on the Hired Candidate Offered by Executive Search Agencies
Executive Search Agencies often offer guarantees on the hired candidates, which is an additional advantage when choosing this recruitment method. This guarantee means that if the newly hired leader leaves or is dismissed within a specified period (usually 6 to 12 months), the agency commits to redoing the recruitment process at no additional cost or refunding part of the recruitment fee. With the guarantee, the company reduces the risk of potentially costly turnover in leadership positions.
Internal HR Department: they do not offer such guarantees, which means that if the hired candidate is unsuitable, the company has to bear the total cost of another recruitment process. This represents a greater financial risk, especially when hiring for senior positions, where a poor candidate choice can be exceptionally costly.
7. Long-Term Return on Investment
Executive Search Agency: Despite the higher initial costs, agencies tend to deliver better long-term results due to superior candidate matching, leading to higher-quality hires and reduced turnover.
Internal HR Department: Lower upfront costs may result in insufficient candidate quality, leading to higher turnover and increased long-term recruitment costs.
Example Comparative ROI Calculation for Executive Search Recruitment Conducted by an Executive Search Agency vs. an Internal HR Department, Considering Time, Costs, and Guarantee Factors.
Assumptions:
Position: Chief Financial Officer (CFO)
Annual gross salary of CFO (base + bonus): Euro 120k
Recruitment Costs:
Executive Search Agency: 25% *of the annual salary = Euro 30k
Internal HR Department: Time and additional costs = Euro 10k
*choice of the agency and negotiation with the agency on different markets, especially in the CEE Region, may give additional savings and make the ROI better
Time to Fill*:
Executive Search Agency: 3 months (90 days – first short list is usuly ready after 40-50 days)
Internal HR Department: 6 months (180 days)
*you can also add notification period of the chosen candidate in his current company. This way the Time to Fill will be even longer.
Vacancy Costs: Euro 500 per day
Executive Search Agency: 90 days × Euro 500 = Euro 45k
Internal HR Department: 180 days × Euro 500 = Euro 90k
Total Recruitment Costs:
– Executive Search Agency: Euro 30k + Euro 45k = Euro 75k
– Internal HR Department: Euro 10k + Euro 90k = Euro 100 k
Comparison
| Factors | Executive Search Agency | Internal HR Department |
| Recruitment costs (Euro) | 30k | 10k |
| Time to Fill (days) | 90 | 180 |
| Cost of Vacancy (Euro) | 45k | 90k |
| Total Recruitment Costs: | 75k | 100k |
| Guarentee (months) | 12 | 0 |
Conclusions:
Despite the higher upfront, direct costs, recruitment through an executive search agency results in lower overall expenses and faster position placement and reduces the risks associated with a failed hire due to the guarantee offered. On the other hand, internal recruitment, though cheaper at the outset, typically involves longer time-to-hire, higher costs from lost productivity, and the lack of a guarantee, which could lead to additional costs in the future.
The choice between an executive search agency and the internal HR department depends on the company’s priorities. Agencies offer faster, more efficient processes, particularly for challenging roles requiring discretion and precision. While agency costs are higher, the potential long-term benefits – such as better candidate fit and reduced turnover – may significantly outweigh the costs associated with internal recruitment.
Ewa Adamczyk
This might also interest you: How choose recrutiment agency? Tips.
Sources own 30+ years long experience and Recruitment ROI Explained Plus How To Calculate It (in 2024) – AIHR