Recruiting through Advertising or Employee Referrals: Costs, Yields, and the Effects of Geographic Focus
Anat Rafaeli Faculty of Industrial Engineering and Management Technion Institute of Technology Haifa 32000 ISRAEL Tel: +972-4-8294421; Fax: +972-4-8295688 E-mail:
[email protected] Ori Hadomi Graduate School of Business Administration Hebrew University of Jerusalem Jerusalem ISRAEL Tal Simons Graduate School of Industrial Administration Carnegie Mellon University Pittsburgh, PA 15213
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Recruiting through Advertising and Employee Referrals: Costs, Yields, and the Effects of Geographic Focus
Abstract Research on recruiting has generally considered the effects of recruiting source on employee retention or quality, and has argued that formal employment ads are inferior to informal sources, notably employee referrals. We test two new dimensions for evaluating recruiting sources – cost per new hire and yield ratio – and suggest a new dimension for distinguishing between different types of employment ads – focus – which we define as the narrowness and distinctiveness of the labor market that an ad is likely to reach. We examine the effects of geographic focus and confirm that geographically focused ads cost less and yield more appropriate applicants than unfocused ads. Considering the cost, yield, and focus of ads can promote the effectiveness of the recruiting process. The study therefore has both practical applications and implications for further research on recruiting sources.
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Recruiting through Advertising and Employee Referrals: Costs, Yields, and the Effects of Geographic Focus Introduction Recruiting sources have typically been considered in terms of their impact on the job performance or turnover of new hires (Decker & Cornelius, 1979; Kirnan, Farley & Geisinger, 1989; Saks, 1994; Vecchio, 1995; Williams, Labig & Stone, 1993). In this research, ads are typically argued to be ineffective recruiting means, while employee referrals are argued to be effective. One explanation has been that ads are formal while employee referrals are informal (Breaugh, 1992; Wanous, 1992; Wanous & Collela, 1989. Performance and turnover of new hires are clearly important, but other parameters may also deserve attention. We suggest two additional parameters for evaluating and comparing recruitment vehicles: Cost per new hire, and yield ratio. In particular we show these parameters to be important for comparing employment advertising and employee referrals, because they can shed new light on the effectiveness of ads, showing some ads to be more effective than others.
Advertising focus – Page 4 Cost of Hiring as a Criterion of Source Effectiveness Surprisingly, there is little documentation of the cost effectiveness of various recruiting sources. The variable in question here is the direct dollar cost of hiring an employee through a particular source. Higher costs may be justified for very important employees, or for employees with uncommon skills. Even so, such costs need to be recognized as a decision element of a recruiting process. Assumptions about costs of various means of recruitment are not uncommon (cf. Boudreau and Rynes, 1985), but there is no empirical research or verification for these assumptions. The critical issue would be the cost of a recruiting process per new hire, and there is good reason why certain recruiting sources can be expected to be more expensive by this standard than other sources. In particular, it is highly normative to pay for formal recruiting sources such as newspaper ads, while it is not necessarily normative to pay for informal sources such as employee referrals. Some organizations reward employees for successful referrals, but even so, such payments rarely reach the cost magnitude of placement agencies or media advertising. This seems reasonable, since these formal sources require administrative staff to perform recruiting tasks, while employee referrals are assumed to rely on casual, unplanned and unscheduled processes not requiring direct payments (Anderson, 1998). Employees may also derive intrinsic satisfaction, or what Chatman, Bell, & Staw (1986) label positive self-justification, from referring new employees, making financial rewards from the organization less important. In this analysis, the key difference that emerges between more and less costly sources is that sources known as 'formal' are likely to be more expensive than those considered informal sources. Our first hypothesis therefore compares the formal source of employment ads to the informal source of employee referrals:
Advertising focus – Page Hypothesis 1:
5 Recruiting through employee referrals will be less costly than recruiting through employment advertising.
Yield Ratio as a Criterion of Source Effectiveness A second criterion we suggest is yield ratio, which we define as the proportion of new hires from the complete pool of applicants produced by a recruiting source. Cascio (1982: 188) defines the bottom line of recruitment success as "the number of successful placements made,” meaning new hires who stay in the job over time. Following this definition, yield ratio is not an indicator of bottom line success. Yet bottom line considerations in organizations should try to minimize the costs of processing unsuitable applicants. With a higher yield ratio, more job applicants are ultimately found suitable for and join the organization, giving the recruiting process a higher return-on-investment (ROI) and making it economically more efficient. With a lower yield ratio a greater proportion of the organizational investment in screening applicants is in vain. We can therefore assume a higher yield ratio to be a more desirable yield ratio for the organization1. There are reasons to expect employee referral recruiting to produce a higher yield ratio than employment advertising. This pattern is consistent, for example, with Swaroff, Barclay, and Bass (1985), who reported that only 3% of sales applicants recruited through newspaper ads were hired, while 14% of applicants referred by present employees were hired. Similarly, Williams, Labig, and Stone (1993) reported the yield ratio of informal sources as 65%, and that of formal sources as only 40%. A higher yield ratio from informal sources is likely in part because informal sources involve more preliminary self screening than formal sources, and self screening is likely to improve the fit between a job applicant and the organization 1
It could be argued that this assumption is not valid if high-validity tools are being used, since such tools operate better in cases of low rather than high yield ratios. But to the degree that organizations seek to avoid unnecessary expenditures, a higher yield ratio can still be presumed to be the desired organizational goal.
Advertising focus – Page 6 (Judge & Cable, 1996). Current employees are in a position to offer prospective applicants a broad range of pertinent information about the organizational culture, so that only individuals who assume they will be fit for the organization are likely to apply for a job (Chatman, Bell & Staw, 1986; Wanous, 1992; Wanous & Collela, 1989). In contrast, less preliminary self screening is to be expected among applicants recruited through employment ads, for whom only information formally advertised is likely to be available. Self screening is assumed to improve the fit of the people who do apply for employment (cf. Schneider, 1987; Judge & Cable, 1996). Thus, in comparing the yield of recruiting sources we can pose the following hypothesis: Hypothesis 2: Employee referrals will produce a better yield ratio than employment advertising2. Focus of Employment Advertising Our analysis thus far has compared the price and yield ratio of employment advertising to employee referrals. We further suggest that identifying the focus of employment advertising can enhance predictions of its effectiveness. Focus is the narrowness and distinctiveness of the labor market that an ad is likely to reach. Focus can help separate between different types of advertisements and identify ads that are likely to be more or less effective. An analysis of "ad focus" suggests that ads posted in different media – professional journals, organizational websites, professional websites, small-town newspapers, national newspapers or international magazines – are targeted at different audiences and cannot be judged by the same yardstick in terms of recruiting effectiveness. Yet all have been categorized simply as "employment advertisements" in prior research.
2
It is possible, of course, that employment ads will trigger people to seek information from current organizational employees, in which case a form of preliminary self screening will occur. This would be an instance of multiple recruiting sources, where formal (advertising) and informal (employee referral) are combined (Williams, Labig & Stone, 1993), that our hypothesis does not address.
Advertising focus – Page 7 To define this concept further, let us look at the distinction between advertising with a geographic and with a professional focus. Ads posted in a journal or web site targeted at members of a certain profession (e.g., "The Orthopedic Employment Portal" -- http://www.orthocareers.com/ ) can be thought of as professionally focused. Ads in publications with a broader, yet still somewhat defined readership may also have a professional focus (advertisements in the Economist, for instance, may be more likely to reach a business audience). Ads appearing in a local newspaper (e.g., the San Jose Mercury News in the U.S. or the East Grinstead Courier in the U.K.) can be thought of as geographically focused, while ads in a general interest magazine (Time, Business Week) or in a national or international newspaper (USA Today, The International Herald Tribune) can be considered unfocused. Ads may also combine a professional and geographic focus (for instance, in a web site targeted at engineers in a particular region). We suggest that knowing the focus of an ad can help in predicting both its cost and yield ratio, and we examine this hypothesis by comparing two subsets of ads: geographically focused and unfocused advertisements. We first predict that employment advertising with a high geographic focus (ie, in local or regional outlets) is likely to be less expensive than advertising with a low focus (in national or international outlets). We also predict that geographically focused advertising will generate a higher yield ratio than geographically unfocused advertising. As explained next, these two predictions are supported by what is currently known about product advertising. Studies of product advertising have recognized that advertising to a larger audience costs more, because outlets charge for ads according to the number of people the ad is likely to reach. The logic of advertising is ‘pay-for-exposure,’ so costs are adjusted to the size and spread of ad circulation (cf. Inland Press Association, 1996). Thus, given the definition of focus, ads in more focused newspapers are likely to be
Advertising focus – Page 8 less costly than ads in less focused newspapers, since they are likely to reach fewer people (Ogilvy, 1985; Aaker & Myers, 1987; Newspaper Advertising Bureau, 1992). This cost difference appears to extend to employment advertising as well. Just to give one example, at the time the data for this study were collected, ads in a local newspaper in Jerusalem, Israel (Kol Ha’ir) cost $65 per column inch, while ads in the national newspaper Yediot Aharonot cost $307 per column inch. In Europe, where the differences in exposure between local and national media are much larger, the difference in advertising cost is also greater. Thus, our next hypothesis presumes that costs are negatively correlated with focus, and proposes that advertising in a highly geographically-focused newspaper will cost less than in an unfocused newspaper: Hypothesis 3:
Recruitment using geographically focused advertising will be less expensive than recruitment through less-focused advertising.
The extra cost of unfocused product advertising is justified by greater exposure and greater potential sales. The extra cost of unfocused employment advertising may be justified if more qualified applicants are recruited. Yet in the case of employment ads, greater exposure does not necessarily mean that more people will apply for the job. Greater exposure also does not mean that more applicants who respond will be found suitable for the job. To the contrary, there is reason to expect that ads in newspapers with greater reach (national or international papers) will draw fewer applications than ads in a local newspaper, and will have a lower yield ratio. This prediction, the last to be presented in this paper, draws from the fact that greater geographic focus is likely to allow more, and more accurate, self selection, because it means more people seeing the ad are likely to know the advertising organization and/or have access to information about it. Simple proximity and familiarity effects mean that people reading ads in a local (read highly focused) newspaper are more likely to be familiar with the posting
Advertising focus – Page 9 employer than people reading the same ad in a national or international publication. This in turn means that people viewing an ad in a local newspaper are more likely to know what an employer expects and offers, and whether they may be suited to work there. Such knowledge is likely to create some degree of self-screening, so people applying for a job in response to a focused, local ad are more likely to be fit for the organization (Judge and Cable, 1996; Schneider, 1987). Moreover, an individual who learns of an employment opportunity through a local newspaper can more easily obtain additional information about the organization, and so improve his or her self selection prior to the application. In contrast, people seeing an ad in an unfocused newspaper are less likely to have access to knowledge about an employer's needs and expectations, and less likely to know where to turn for additional information. Thus, applications through less focused ads are likely to allow both less self screening and less-comprehensive self screening when it does occur. This means they are likely to produce a lower yield ratio than focused advertising, as summarized in our final hypothesis: Hypothesis 4:
Focused employment ads will produce a better yield ratio than unfocused ads.
In short, this study suggests two additional criteria for evaluating recruiting sources: cost of recruiting and yield ratio. It also suggests differentiating between more- and less-focused employment advertising as a way of saving costs and improving the yield ratio. Hypotheses 3 and 4 together imply that recruiting through unfocused advertising is more expensive, while yielding fewer applicants of interest to the organization. The greater expense can be justified by the knowledge that the ad reaches a larger audience, which may serve other organizational interests (cf. Rafaeli and Oliver, 1998). Our current goal, however, is to examine this greater expenditure with respect to immediate recruiting goals.
Advertising focus – Page 10 METHOD Overview Data were collected in one plant of an international, Fortune 500, high-tech organization located in Israel. At the time of the study, the organization was experiencing rapid growth and was considered a highly desirable place to work. For these reasons it attracted a large number of job applicants, and all job offers were accepted. Data were available for the 3766 applicants who applied for employment in this organization during 1995. People who contacted the organization for employment were asked an openended question regarding how they had heard about the employment opportunity in the organization. The responses included local employment advertising; national employment advertising; employee referral; employment agency ('head-hunter'); HR fair; university employment fair; and self initiated approach ('walk-in'). The 2,221 applicants naming sources other than national or local advertising or employee referral, or naming multiple sources (33 applicants), were excluded from the analysis. The final study thus comprised 1,545 applicants. During the period of the study, the company documented spending $521,000 on recruiting activities. This is a significant amount of money, but is not atypical for large organizations (Rosse & Levine, 1997). Only 131 (8.5%) of the 1,545 applicants were hired. Demographic and salary data are considered highly confidential in the organization, and could not be obtained for this study. Nor could we obtain any followup data on job performance or job tenure.
Independent Variable The independent variable of study was the primary source that individuals stated led them to apply for employment in the organization. The question posed to applicants
Advertising focus – Page 11 was: "How or where did you obtain the information about the employment opportunity in NAME-OF-ORGANIZATION?" As noted above, relevant responses were coded into one of the following three categories: 1. Geographically unfocused advertising (national newspaper advertising). The organization had placed weekly ads in all national newspapers in Israel (Haaretz, Yediot Aharonot, and Maariv) on the prime day for employment advertising in Israel (Friday) over the course of a year. Ads were for a full range of positions, were posted in prime (upper left hand) positions (cf. Bovee & Arens, 1992), and were designed with color and catchy slogans, to be highly attractive3. 2. Geographically-focused advertising (local newspaper advertising). All the ads placed in the national newspapers were also posted in the leading local newspaper in the organization's home city every Friday over the course of the year. 3. Employee referrals. At the time of the study the organization had no formal employee referral policy, so employees were not rewarded for bringing in new hires. There was no control over the nature of the relationship between the applicant and the referring employee, but building on previous research on recruiting, this was considered an informal source. Dependent Variables: Two dependent variables were calculated for each of these recruiting sources: 1. Yield ratio was the proportion of new hires from the total number of applications through that source. This variable was computed by dividing the number of new hires a source yielded by the number of applicants drawn through that source. 2. Cost per new hire was the direct cost of hiring an applicant. Operationally, this involved dividing the total expenditure per hiring source by the number of new hires recruited through that source. This is an underestimate of the total expenditure on 3
These newspapers are also distributed internationally, suggesting an extremely broad focus.
Advertising focus – Page 12 recruiting, because indirect costs of processing applications, interviewing, etc. are not included. These additional costs could not be quantified.
Results Table 1 summarizes the data analysis, which supported all the hypotheses. _______________________ Insert Table 1 Here _______________________ Consistent with the first hypothesis, the cost of recruiting through employee referrals was lower than recruiting through employment advertising. As evident in Table 1, the average cost of hiring through advertising was significantly higher than hiring through employee referrals ($22,652 per new hire, compared to nothing for hires recruited through referrals). While this may not be surprising given that employee referrals are cost-free, the average cost of recruiting employees through national advertising is a striking $81,000 per hire, confirming the importance of considering this variable in recruitment evaluations. Consistent with the second hypothesis, the yield ratio of employee referrals was greater than that of employment advertising: 0.133 (109 new hires out of 821 applicants) as compared to 0.032 (23 new hires out of 724 applicants). Consistent with the third hypothesis, focused employment ads were far less expensive than unfocused ads -- $1,140 per hire as compared to $81,000 per hire. Consistent with the fourth hypothesis, the yield ratio of focused advertising was greater than that of unfocused advertising: local advertising produced a yield ratio of 0.073, compared to 0.018 for national advertising. In sum, the cost of the informal source – employee referrals – was the lowest of the three sources we compared. This finding is clearly due to the lack of any financial compensation to employees bringing in job applications. However, the cost of
Advertising focus – Page 13 recruiting through focused ads was far and away more reasonable than the cost of recruiting through unfocused advertising. Thus, our analysis confirms recruiting through advertising to be more expensive than recruiting through employee referrals, but also confirms unfocused advertising to be substantially both more expensive and less effective than focused advertising. Since informal recruiting is dependent on the decisions and actions of employees, which are not easy to plan or control, this analysis suggests ways in which organizations can improve the effectiveness of formal recruiting and reduce its costs.
Discussion Our analysis makes two key contributions to the available literature: (1) it suggests two new criteria for comparing recruitment sources -- cost per new hire and yield ratio; and (2) it suggests and documents the merit of comparing employment ads according to their focus. Our contribution, therefore, is to the understanding of how to evaluate recruitment sources, adding to commonly used parameters such as performance or turnover of new hires, as well as to the understanding of how to distinguish among different types of advertisements. In previous research, ads were assumed to be formal and therefore ineffective sources (cf. Wanous, 1992). Our examination of ad focus shows that different ads may be more or less effective in recruiting new hires at reasonable cost. Below we discuss several limitations to our analysis, along with ideas for future research. Limitations There are several limitations to our theoretical analysis and to our empirical study. First, it is possible to challenge our assumption that a higher yield ratio is necessarily a better yield ratio. For example, in terms of the success of personnel selection procedures, a low yield ratio could be argued to be preferable in that it minimizes the ratio of selection successes to failures. For example, the higher the validity of selection
Advertising focus – Page 14 procedures, the steeper the improvement in selection success, an effect that is particularly pronounced with low yield ratios (cf., Ghiselli & Brown, 1955: 147). Therefore, in terms of utility of selection procedures, the higher costs of formal and unfocused source advertising may pay off. This may be particularly the case for management positions, where the proficiency (i.e., ratio of the best to the poorest worker) is likely to be higher in jobs requiring high levels of qualification (Ghiselli & Brown, 1955)4. We are unable here to consider the validity or utility of various selection procedures because the organization could not provide us with the necessary data. We also could not verify whether the more costly new hires that our data reveal were employees with less common skills, or with more responsibilities, such as senior managers. It could be that special qualifications of certain new recruits could justify the extra expenditure we documented. In addition, if certain demographic groups may be reached more effectively through high-exposure, non-focused advertising, then social, legal, and ethical considerations may justify the extra costs (cf. Kirnan et al., 1989). Second, there is the question of generalizing our findings. As noted in the discussion of our methods above, the organization we studied essentially duplicated the ads it posted, so that the same ads appeared in both local and national media sources. This may not always be the case. It could be, for example, that organizations tend to advertise non-exempt (lower level) positions at the local level, while higher-level management or executive positions cannot be filled through local advertising and may require the broad reach and extra expenditure of low-focus advertising. Additional follow-up research is needed to test our analysis by looking at yield ratios for different jobs and different job levels. Nonetheless, in the context of previous research on recruiting sources, this study suggests that focus can add predictability to the yield of a recruitment effort. Without 4
We are indebted to the associate editor and an anonymous reviewer for bringing this point to our attention.
Advertising focus – Page 15 the focus dimension, in the data we described, the effectiveness of newspaper advertising would have appeared significantly lower than that of employee referrals. Our analysis shows that geographically-focused advertising more closely approaches the effectiveness of employee referrals in yielding new hires, and not at a prohibitive cost. Considering the distinction between local and national advertising can thus improve the utility of recruitment through ads. Third, the organization we studied did not reward employees for new hire referrals. The relative cost estimates reported here for informal recruiting sources will necessarily be higher in organizations that reward employees who bring in new hires. In response to the findings reported here, the organization we studied began to reward employees who referred new hires, with a modest bonus to the employee for any new hire who stayed with the organization for more than a year. Such reward programs increase the relative expenditure of informal recruiting. Moreover, the dynamics of employee referrals may change once employees are rewarded. Deci (1980) suggests, for example, that rewarded employee referrals will be less effective. Fourth, although we showed focus to be relevant to cost and yield ratio, it may not be relevant to other goals that ads may accomplish. To illustrate, ads in national or international newspapers (e.g., International Herald Tribune) may help in building an organizational reputation (Rafaeli and Oliver, 1998; Rafaeli, 2000), a goal for which ads in local venues are likely to be far less effective. In a similar vein, this study did not address the effects of multiple recruiting sources. This has been argued to be a critical aspect of the effects of recruiting sources (cf. Williams, Labig, and Stone, 1993). It could be, for example, that low-focus (and therefore wide-distribution) ads act as triggers that motivate employees to tell their friends and contacts about employment opportunities in the organization. Unfocused ads may therefore play an essential part in the recruitment process that cannot be measured through applicant surveys and the like.
Advertising focus – Page 16 Toward Future Research In addition to geographic focus, which we examined here, other forms of focus may be worthy of exploration. For example, advertising in technical or professional outlets – which we call "professionally focused advertising – can be predicted to be more effective than advertising in the general media. An organization seeking an economist, for example, may gain a better yield from an advertisement in the Economist or Financial Times than from one in the Herald Tribune or in a local newspaper. Moreover, the concept of focus may be relevant to other forms of recruitment besides employment advertising. For example, university recruiting may be geographically highly focused or less focused, depending on whether an organization recruits from a single, nearby institution; from universities within a larger but still limited region; or from within a very broad area, like Europe or the U.S. University recruiting may also be professionally focused, as in the recruitment for investment banking positions in a business school environment, or recruitment of engineers in a technical institution. Similar to employment advertising, university recruiting has been considered as a formal source in previous research (cf. Turban & Dougherty, 1992), so introducing the idea of focus to analysis of this source may more accurately reveal its effectiveness. The Internet, which is emerging as a new and central medium for recruiting, further demonstrates how the concept of focus can contribute to predicting the effectiveness of a recruiting source. Like employment advertising, Internet recruiting is a formal process that can be more or less focused. National and international websites devoted to matching employers with applicants (e.g., http://Monster.com ) seem to be Internet versions of traditional general-interest newspaper employment ads, suggesting
Advertising focus – Page 17 that these should be considered unfocused. Professional forums offer greater focus (e.g., "The Orthopedic Employment Portal" -- http://www.orthocareers.com/), while ads placed on a general organizational home page (http://Intel.com ), like those posted on general employment boards (e.g., http://Monster.com), are unfocused. Our prediction would be that more focused forums will provide better yield ratios at a lower cost, but this is a prediction that requires verification in future research. Extending the concept of focus to include both geographic and professional focus raises questions about the interplay between different types of focus. Is one type (geographic or professional) more effective than the other? Are they additive or alternative? Alternately, are there variables that moderate the effectiveness of different types of focus? In other words, are there specific conditions under which one or the other is likely to contribute more to the effectiveness of a recruiting source? One interesting hypothesis is that cultural and socio-economic factors may moderate the dynamics of focus on recruiting. Geographic focus may be more powerful in a society that is relatively collectivistic, such as Israel or Japan, than in extremely individualistic societies such as the U.S. or Great Britain (cf. Hofstede, 1991; House et al., 2004; Schwartz, 1997, 2003). It is possible that in collectivistic societies, access to knowledge about local organizations and the self screening it can inspire is a more critical factor than in an individualistic society. In contrast, professional focus may be more powerful in individualistic societies, where professional development may be a more primary goal. Such cultural biases are suggested by cultural differences in the content of employee advertising (Rafaeli & Oliver, 1998). In cultures that are more collectivistic, local newspapers may be unlikely to carry advertisements for employment in distant locations. Indeed, local newspapers in Israel rarely carry ads for employment outside the range of a reasonable commute, while in the U.S. this is not uncommon. For
Advertising focus – Page 18 example, newspapers in Texas and Iowa in the U.S. often include ads for employment in California. To conclude, we believe it would be unwise for organizations such as the one studied here to stop engaging in national (unfocused) employment advertising. As noted earlier, such ads may be essential for recruiting employees with special skills, and can serve as important vehicles for public relations (Rafaeli, 2000; Rafaeli & Oliver, 1998; Rindova & Fombrun, 2004; van Riel, 1997). Cutting out unfocused advertising might also put an end to any multiple-source effects to which widedistribution ads contribute. A more appropriate conclusion from the present study is that the study of recruiting sources requires inductive, qualitative research, with methodologies such as ‘Verbal Protocol Analysis’ (Barber & Roehling, 1993) or network analyses (cf. Ibarra, 1992) that could unravel currently unrecognized social and psychological dynamics of employee recruiting.
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Table 1 Costs and Yields of Recruiting Sources according to Formality and Geographical Focus Recruiting Source
Direct Annual Cost
Number of Applicants
Yield Ratio5
Number of New Hires
Cost Per New Hire
Formal and Unfocused Source:
$ 405,000
277
5
.018
$ 81,000
National Newspaper Advertising Formal and Focused Source:
$ 116,000
447
17
.073
$ 1,149
Local Newspaper Advertising Total Formal Sources:
$ 521,000
724
23
.032
$ 22,652
National and Local Advertising Informal and Focused Source:
$
821
109
.133
$
0
Employee Referrals Total:
$ 521,000
1545
131
.085
$
627
0
Values in this column are percentages of applicants who were hired from the pool of applicants from a given source. (All proportions in this column are significantly different from each other (p
