Can I Afford to Add a New Person?

Owners and senior leaders can stumble when it Team of Young Business Executivescomes to adding a new person.  This is often an emotional decision to fix what appears to be an immediate problem or opportunity that you and other employees cannot handle or handle well.  While it may be relatively easy to hire an additional person (assuming they are qualified) the first step is to make sure that the position can pay for itself.

Return on Investment
Each employee of the business needs to be viewed as an asset that you are investing in and that investment should produce a return equal or greater than the total cost to the business.  Yes, like a piece of equipment there should be a Return on Investment or an ROI.

Cost Justification
This approach is crucial to the effective operation of a small business. An under performing position or person will need be carried by others for the business to achieve its financial goals. Each additional person must carry their weight and contribute to the financial performance of the team or business.  Employee morale will be affected under performing people and if not addressed will result in an excuse for other employees to not perform.

Initial efforts to justify an additional person may not include all of the elements to make a good decision.  The analysis to add a person should at least include the following:

  • Defined job definition or description.
  • Analysis of the impact on the organization without the person.
  • Analysis of the incremental benefit of adding the new person.
  • A clear method on how the productivity of the new person and team will be measured.

Investment Return
It is not unusual for the person justifying the position to over state (possibly a better term is exaggerate?) how the new person or position to be filled will be of value.  While the expertise of the person or position may have value, the key question to answer is will that value convert to a net increase in cash generation equal to or greater than what that person will cost.

A cost benefit analysis is Important in the decision process to add a new person as it reveals the reality of real business issues that come into play.  If the person is going to be paid a salary of $50,000 per year plus benefits that might total an additional $15,000 then the presence of the new position needs to enable the business to generate a net increase of at least $65,000 in additional money from somewhere – productivity, sales, administration efficiencies, etc.

Examples
Operations
The productivity of a crew could be increased with an additional person thereby increasing the team’s throughput over a year that would therefore reduce the average cost of goods by $65,000 or more.  The new position would increase the velocity of product through the group, which would amortize the cost to produce over a larger number of units and therefore reduce the average cost through that operation.
The management challenge is for the team to truly achieve its productivity goals.  This can normally be determined by evaluating productivity reports or financial statements.
Sales
If the position is a new sales person then the “savings” or “value” is measured in the incremental margin contribution as a result of increased sales.  To cover an increase in expense of $65,000 it may be necessary for the new person sell at least $650,000 per year of products and/ or services depending how much gross margin is in each dollar of sales.
Indirect
The hardest position to justify is where an indirect position is being considered.  An indirect person might be someone in sales admin, engineering document control, or customer service for example.  Indirect positions are not directly involved in the sale and delivery of product to the customer.
Indirect departments may keep accurate metrics on what they do in relation to business volume.  Accurate metrics make it easier to analyze how an increase in demand for services on an indirect operation to serve other groups within the company will justify additional resources so that requests for service can be met in a timely manner.  The assumption being that the increase in demand on the department is due to increased revenues that will justify the additional indirect overhead.
Using the sales example above the sales goal may have to go to $1M per year to cover the cost of the sales person and associated indirect employees to support the increase in sales.

 

Summary
The more information you have on how your business operates will greatly enhance your ability to calculate the investment return of adding an additional person to the organization. If the numbers don’t work but you feel you still have the problem then you need to step back and see if there is another “non-employment” solution.

Too many times people are added to an organization because of unaddressed organization dysfunction in other parts of the business.  Do not be blind to identifying what the real problem is:

  • Poor performance by another employee, which has not been addressed.
  • Inconsistent business practices that leads to busy work.
  • Poor training or equipment that keeps employees from reaching productivity objectives.
  • Poor or no feedback on the productivity indicators of the problem operation.

Keep your eyes open and make sure you are solving the right problem and that the solution results in an increase in the financial performance of the business and a high return on your investment.

Don’t just add a new person to feel good that you have done something! Know what the return should be and track it to make sure it happens.

Comments

  1. Too often I see the results of companies arriving at the new employee’s compensation level through a more of a “seat of their pants” approach as opposed to having some hard data on competitive pay for this new role. Without a proper analysis of competitive pay from a good source or two of salary data of companies that are competitors of people for your company (not necessarily industry competitors), you may end up over or under paying with a mess to clean up at some point down the road. You may also cause internal equity issues for existing employees in similar roles. It’s best to put some time and effort into coming up with a starting compensation rate that reflects your desired competitive market position, takes into consideration pay levels of comparable roles at your organization, provides for a proper analysis of competitive pay rates in the marketplace, and results in a well thought out offer that makes sense for your organization and is defensible.

  2. @bill You are absolutely right. The best way to compromise a reasonable recruiting process is to use an informal (non-analytical) method to determine compensation and in particular variable compensation. It improperly motivates the new employee and can destabilize the attitude of others regarding their compensation.

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