Professional sports and entertainment organisations have long known that the ability to recruit the right people has the highest profit impact of any HR function.
BCG’s ground-breaking study
The Boston Consulting Group (“BCG”) released a ground-breaking study in 2012 that identified a positive correlation between key HR functions and a company’s profit margin.
One of the key findings of this study was that recruitment was the most impactful HR function of all.
Companies with highly capable recruitment functions achieved, on average, 2.0 times the profit margin of their less capable peers.
The better your company is at attracting and selecting A-Grade people, the more profitable it is likely to be.
A-Grade vs average
Most business owners and managers make the assumption that performance follows a normal distribution – a bell curve that suggests the majority of people will perform in an ‘average’ manner.
However, a 2012 study by O’Boyle and Aguinis published in the Personnel Psychology journal, found that in over 93% of cases a Paretian distribution more closely represented the distribution of performance than a normal distribution.
What this means is that most performance was generated by a small group of A-Grade people. It’s no coincidence that a large number of your favourite athletic, entertainment or ‘employee of the month’ awards go to a small group of high performers.
Profit impact of A-Grade people
We all know that top performing employees generate more for companies than the average employee. But how much more?
Research by McKinsey[1] indicates that A-Grade people (defined in this study as the top 20%) have a significantly higher profit impact when compared to average employees:
*Note: A 40% productivity increase means the same amount of work can be done with 29% fewer employees[2].
When the compensation premium required to attract A-Grade performers is taken into account, the return on investment argument for recruiting A-Grade people is very convincing.
Implications for recruitment
The findings of the research quoted in this blog do not mean that companies should only employ high performers. From an availability and a remuneration and incentives perspective, this is simply not realistic.
However the research does imply that companies should have a thorough understanding of their structure and the critical / high impact roles so that A-Grade talent can be selectively recruited for key positions where they will have the highest profit impact. For some roles a solid B-Grade candidate will be sufficient (C and D-Grade candidates should always be avoided!).
[1] McKinsey, War for Talent 2000.
[2] Using 100% as baseline productivity for the average operational employee, a 40% productivity improvement equals 140% (100% + 40%). If all operational employees produced at 140%, 71 workers would produce the same amount of work otherwise done by 100 workers (100 / 140 = .71), resulting in a workforce reduction of 29% (100 – 71 = 29).
Executive SearchPerformance Improvement
Are you looking to hire a new executive? Too many businesses fail to nail the scoping process or rush the selection phase and then can’t get the top talent.
1min Read
CultureExecutive SearchStrategy Development
This blog by Scott O’Hehir was recently featured on the Total Synergy website.
1min Read
Executive SearchLeadership DevelopmentStrategy Execution
There are a lot of articles and resources dedicated to helping businesses think differently and adjust post Covid-19. Changing your strategy and business model is inevitable for many businesses, BUT the question as to whether you rebound and survive will all come down to how well you execute on the game plan you put in place. And when it comes to execution, the key determinant of success is the capability of the people on your team.
2min Read