When do you hire someone? Microeconomics for HR Professionals

Microeconomics

“When the hiring manager says so”, right?  And sure, you want to provide customer service to the humans that you support.  The larger question, though, is when does your organization hire someone?

The economics concept to understand here is “margin”.  When an economist talks about margin, they’re talking about one additional item.  That is to say, the “marginal cost” of an iPhone is the cost to make the next one.  This doesn’t take into account all of the R&D, testing, or marketing costs that went first — just the cost of one more.  Likewise, marginal revenue is what you’ll make from selling that iPhone.

Your next hire works the same way.  Adding one person will cost you something at the margin.  You already have the desk and the office space, and you won’t have to invent a new compensation system, but there is an additional cost to adding this person.  Likewise, the addition of this person will have some impact on your company’s revenue.

The Microeconomics answer to the first question, then, is “When the marginal cost of adding the employee is less than the marginal reward.”  Put another way, you hire someone new when they can pay for themselves.

There are two reasons that you, the HR person, should understand this.  The first is that the company cost and reward aren't equal.  That extra amount, between the employee’s value to the company and what they

’re paid, is why it’s good to be an owner!

The second implication for HR, though, is that some proposed hires shouldn't happen.  An additional headcount should to be a net financial gain for organization.  If you hire too many new employees who don’t add revenue, you’ll bring down your revenue per employee – and ultimately damage the company’s bottom line.

Your company probably has a process in place for approving capital investments.  Before you buy a new piece of equipment, or open a new location, someone figures out how long it will be before that investment pays for itself.  A true HR business partner with a ‘seat at the table’ recognizes that adding a person is another company investment, and holds hiring managers to a similar standard.

Note: Some of the inspiration and background for this post came from a Planet Money podcast, “How to Create a Job“.  If Planet Money isn't currently part of your iTunes or podcatcher, add it!  Their common-sense explanations of economic topics can't be found anywhere else.

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Steve Gifford
Steve Gifford, MBA, SPHR, is the Director of Human Resources for OEM America, a PEO of more than a hundred companies and more than two thousand employees. His company gives small businesses the buying power and HR expertise of a big company, but without the bureaucracy! In the past, he’s been the HR guy for marketing, manufacturing, retail, and government organizations. His first HR job was in the US Army during his second tour in Iraq, where every employee in his client group carried an automatic weapon. It helps him keep the problems of employees who show up to work late in perspective.

2 Comments

  1. Josh Tolan says:

    Interesting post! Before scheduling an interview with a talented candidate, whether in person or through online video, it’s important to ask yourself whether the person is needed at all. Looking at the microeconomics of hiring will allow you to be honest with yourself and the company about whether a new position really needs to be filled or whether it will just be a drain on the company’s bottom line.

  2. ToddR says:

    In our company, before a requisition is approved, a well crafted ROI must make its way up the chain. If the numbers don’t make sense, the req is rejected. Rejection rarely happens because the line managers know well in advance whether or not their department can justify and sustain another FTE.

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