6 Steps to a Good Hire

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Whether your business is growing, shrinking, or has leveled-out, knowing when to make changes to your employee head-count is never easy. To help you through the process, here are six steps to make sure you’re making the right decisions when it comes to your most complex, critical, and expensive resource – your people.

Step 1: Revenue per Employee

Before you consider making any changes to your staff, start by calculating your revenue per employee. In his OPEN Forum article, Mike Periu identifies revenue per employee as The Most Important Ratio for Your Business. Compare where you stand with your historical performance and with others in your industry. This metric, more than any other, will let you know when you should hire, fire, or hold.

Step 2: Consult Your Financial Model

If you don’t have a detailed, five-year financial model for your business, then you should create one. Whether you are putting your first financial plan in place or you have been using one for years, make sure it has a detailed staffing plan that correlates to your plans for growth. After all, the first or second largest expense in every business is people. That’s deserving of some detail, not a lump sum number lacking context and modeled assumptions.

Your financial model show a realistic revenue per employee number as your company grows, and it should also be well thought-out in terms of the mix of employees between the core activities of your business – marketing, sales, operations, customer service, accounting/finance, human resources, legal, quality, R&D, and so on. When deciding to hire or fire, the financial and operational ramifications can be answered if you keep your five-year financial plan up-to-date and consult it before you take action.

Step 3: Consider All Other Alternatives

Employees are fixed costs, but they are so much more complex than all of the other expenses in a business. You build relationships with your employees and invest a great deal of time in trying to help them be successful in your organization. If you’re thinking about hiring, remember the last time you had to let someone go. Terminating an employee is never an easy job, especially when you are aware, through your relationship, of the ramifications it will have on the employee and his/her family. Consider how processes and technology might be leveraged as much as possible in lieu of hiring, holding off as long as possible.

Step 4: Know Sales Equivalency

Do you know how much your business must sell to cover the cost of an employee? Assuming their wages do not fall into the direct labor category of your costs of goods sold, you can figure out the sales equivalency to break even on each new hire. Take the annual cost of the new employee you are going to hire, including payroll taxes and benefits, and divide it by your contribution margin, which is the percentage of sales left after you subtract all of your variable costs. Your hiring decision should create a “yes” answer to at least one of the following three questions. Will the new hire generate at least their sales equivalency to break-even? Will the new hire save the company at least the cost of their total compensation package? Will the new hire improve productivity to generate enough additional revenue or cost savings to justify their hire?

Step 5: Perfect Candidate to Well-Defined Job Description

Before you hire, spend some time and effort to correctly define what the person will be doing. I know this may sound elementary, but most entrepreneurial companies fail to create clear expectations, mainly because the position is new to the company and the existing team may have never hired someone for a similar position before. You will save yourself, your team, and your new hire a lot of frustration and wasted effort by creating a well-defined job description and then finding the perfect candidate for the job.

Step 6: Proven Program to Retain

Even if you hire the perfect person for the new position, it will be worthless if you do not retain this new employee, and all of the rest of your employees for that matter. Some studies estimate the cost of employee turnover to be as high as 30% of the employee’s annual total compensation. Assuming the most recent employee that left your company had a total compensation package of $45,000/year, that means their departure cost your organization $13,500.

I recently met the President of a successful and growing company who explained his philosophy for retaining employees. He said that his job as the President is to take care of the employees. In return, his employees will take care of and serve the customers. Then the customers will take care of the company, which will allow the company to take care of him. With this focus, entrepreneurs should create a program and an environment within which their employees can thrive and fulfill their professional interests.

When you hire someone to join an organization like that, you're all bound to succeed.