3 Step Method for Calculating ROI of Employer Branding

As an HR Executive, you know you have to bring the numbers. At your 1000 employee company that means justifying resource requests. It can often feel like resources for employee branding efforts are hard to come by. It will be easier if we do a little digging and a little math.

Here is a simplified* calculation for the return on investment (ROI) from improving your employer brand efforts. We'll focus on the potential costs and three main areas where you might see quantifiable benefits: reduced hiring costs, improved employee retention, and increased productivity.

Here's the 3 step basic approach:

Step 1: Pre-work

1. Clearly state the business goal. What is the most compelling improvement you think this could make for the business and can you measure it?
   1. See a 5% decrease in the Costs to Hire by the end of next year.
   2. Decrease the number of days lost to injury by 50% by the end of next year?
   3. Decrease employee turnover by 2% by the end of next year.
2. Decide if you are going to calculate a 1- or 3-year ROI period. If you answer yes more than no to the following questions, go with a one year calculation.
   1. Questions to ask:
      1. Are we hiring more than 10% of our employee base each year?
      2. Are we anticipating or experiencing significant company growth?
      3. Are we experiencing a merger, or other major business transformation?
      4. Are we under performing financially?

Step 2: Calculate the Factors

Factor 1: Reduced Hiring Costs

• Average Cost to Hire (Before): This includes expenses related to recruiting, such as advertising job postings, recruiter fees, and interviewing time.
• Average Cost to Hire (After): Typically, a strong employer brand reduces these costs because it attracts more candidates organically and speeds up the hiring process.
• Annual Hiring Volume: How many people you hire per year.

Formula:

(Average Cost To Hire(Before) − Average Cost To Hire(After)) × Annual Hiring Volume = Reduced Hiring Costs

Factor 2: Estimate Improved Retention Savings

• Annual Turnover Rate (Before): The percentage of employees leaving each year before improving the employer brand.
• Annual Turnover Rate (After): Expected percentage after the improvement.
• Cost to Replace an Employee: Usually calculated as a percentage of the employee's salary (often 50-250% depending on the role).

Formula:

(Turnover Rate (Before) - Turnover Rate (After)) X Number of Employees X Cost to Replace an Employee = Estimated Retention Savings

Factor 3: Increased Productivity

• Average Revenue Per Employee (Before): This can be derived from your total revenue divided by the number of employees or a calculated Full-Time Equivant (FTE) you already have on hand.
• Expected Increase in Productivity: This can be an estimated percentage increase due to higher engagement and better alignment with company goals. Be realistic and get input from your COO. Here are some questions to ask them.

Formula:

Average Revenue Per Employee X Number of Employees X Expected Increase in Productivity = Increased Productivity

Factor 4: Employer Brand Costs

• Employer Branding Costs: Creating or updating of an employer brand strategy and system can take several forms. Cost options.
• External Marketing: Only include the spend you plan beyond your existing budget.
• Internal Marketing: Include additional spend on retention and internal communication activities.

Formula:

Employer Branding costs + External Marketing + Internal Marketing = Employer Brand Costs

Step 3: Total ROI Calculation

Formula:

(Reduced Hiring Costs + Estimated Retention Savings + Increase in Productivity) 

Example Calculation

Let's assume:

• Average Cost to Hire (Before): $5,000
• Average Cost to Hire (After): $3,500
• Annual Hiring Volume: 100
• Annual Turnover Rate (Before): 10%
• Annual Turnover Rate (After): 7%
• Cost to Replace an Employee: 100% of annual salary
• Average Salary: $50,000
• Number of Employees: 500
• Average Revenue Per Employee: $200,000
• Expected Increase in Productivity: 3%
• Employer Branding Costs: $250,000
• External Marketing: $50,000
• Internal Marketing: $50,000

(Take the time to adjust these formulas based on more precise data specific to your organization and industry.)

Now plug in the values:

Reduced Hiring Costs: ($5,000 - $3,500) X 100 = $150,000

Retention Savings: (10(10% - 7%) X 500 X $50,000 = $750,000

Increase in Productivity: $200,000 X 500 X 3% = $3,000,000

Employer Brand Costs: $250,000 + $50,000 + $50,000 = $350,000

Total ROI: ($150,000 + $750,000 + $3,000,000) - $350,000  = $3,550,000

This simple model gives a rough estimate of the financial benefits of improving your employer brand. And, should set you up for good conversations with your executive peers.

Skip the math

You can find a helpful Employer Branding ROI calculator here. Enjoy!

*Is the Return on Investment scrutiny a little more intense at your company? Do you feel like you need to look at a 3 year or longer ROI period? Ask your CFO for guidance on deeper analysis that may involve things like Internal Rate of Return (IRR), Net Present Value (NPV), and deeper analysis of the Payback Period.

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