The Cost and Benefit of “Poaching”

By Fay Hansen

Nov. 8, 2005

Direct recruiting from competitors, customers and vendors can produce a high-performance workforce. It can also break the bank. In recent discussions, however, a series of questions about the ethics of “poaching”–the misnomer often used in the recruiting industry–have overshadowed the more fundamental issues of costs and benefits.

    The ethics questions can be disposed of in the same terms that apply to most business practices, according to Charlie Jones, vice president of process and operations at Yoh, a technical and professional staffing firm that recruits heavily from competitors and companies in related industries. “If recruiting involves misrepresentation or deceit, it’s unethical,” he says. “It’s just that simple.”

    Yoh constantly recruits to maintain its own internal staff of 350 employees plus 5,500 contract employees on assignments with clients. The interesting fact about Yoh is not that it engages in direct recruiting without ruse phone calls or covert practices, but that it recruits passive midcareer candidates from competitor firms without moving beyond market wages.

    Direct recruiting is expensive. Yoh has minimized the pain by developing a package of noncash or intangible premiums focused on career development that pull in new employees without setting off bidding wars.

    Those bidding wars are by far the largest expense involved in direct recruiting, and when they force internal equity adjustments, the costs can be huge. In addition, direct recruiting almost always involves an investment of time that goes well beyond the more simple techniques of advertising jobs and sifting through résumés.

    But these higher costs may be offset by the benefits of bringing in talent with industry-specific skills and experience. And with product cycles growing shorter and the need for speed now dominating whole industries, direct recruiting may be the only viable approach for a growing number of employers.

Driving Up Labor Costs
    The largest potential pitfall in direct recruiting is that a company may drive up its overall labor costs by employing it. Companies commonly pay a premium of 10 percent to 20 percent to a candidate to come over from the competition, depending on the level of the position and the length of time that the employee has worked for the firm, according to Jamie Hale, national practice leader for workforce planning at Watson Wyatt Worldwide.

    “In addition to offers of higher base pay, you have to look at the total package, which includes signing bonuses and incentive compensation,” she cautions. “It varies widely by position and the specific situation of the candidate–for example, whether they had to leave stock options or a bonus on the table.”

    When the new employee with the higher base salary joins the existing workforce, internal equity issues may surface. Even when the salary is equal to salaries for existing employees, equity issues appear because the experienced employees expect a higher rate based on their tenure at the firm. “If these internal equity issues arise, then there is the substantial cost of making equity adjustments,” Hale says. “Equity issues can also cause morale and productivity problems, which are softer costs and hard to measure, but an important factor.”

    Direct recruiting is most common in industries such as health care, where labor markets are tight and jobs are roughly comparable across organizations, and IT, where specific skills are in high demand. These industries provide a stark example of the potentially damaging cost consequences of intensive direct recruiting from competitors.

    A study Watson Wyatt conducted for a health care client found that the difference between the 50th and 75th percentile in base pay is now very narrow, largely because of direct recruiting. “The difference was wider, but the health care organizations began to steal from each other and raised the bar to a level of pay that is so high that it cannot be raised much further,” Hale says.

    The difference between the 50th and 75th percentiles for some health care jobs is now only 7 percent to 9 percent, according to the Watson Wyatt study. In other industries, the difference is commonly 12 percent to 15 percent.

    “Essentially, a group of employees who were at the 50th percentile were recruited away to competitors, with their salaries pushed up to the 75th percentile in the process,” Hale reports, “but this has happened so much that the 75th percentile is now like the 50th percentile again, but at a higher level.” The resulting industry-wide wage inflation eventually damages all of the organizations and wipes out any initial gains made through direct recruiting.

    “Health care companies cannot pay huge premiums because they create major internal equity problems for jobs that track very closely from one organization to the next,” Hale says. “If a health care company brings in a new hire at a higher salary, it will have to make equity adjustments and that can run into millions of dollars.”

    Hale cites the example of Houston’s Texas Medical Center, which includes 42 health care organizations with 65,000 employees, all concentrated in one area. “A nurse can change jobs without changing where she parks,” Hale says. “Turnover rates are 20 percent to 25 percent, and huge costs appear when you enter into a vicious cycle and are constantly recruiting. To attract employees, you add $1 an hour, and it gets expensive.”

    The net gains from direct recruiting diminish if new employees are recruited back to their former employer or leave to collect another signing bonus and base increase at another competitor. Some signing bonuses stipulate that the bonus must be repaid if the employee leaves before a specified date, Hale says that this measure is often difficult to enforce.

    Although some companies assign direct recruiting tasks to in-house staff, Hale says that most companies prefer to use a search firm for recruiting from direct competitors and particularly for recruiting from customers or vendors. Using a search firm adds 20 percent to 30 percent to the cost of the hire. Higher recruiting costs, combined with signing bonuses and base pay premiums, push the cost of direct recruiting well past the cost of recruiting active candidates.

Noncash Premiums
    To avoid the upward spiral in costs that comes with direct recruiting from competitors, some companies have developed a package of noncash or intangible premiums focused on career development. Yoh has crafted an approach that relies on “partnering” with candidates to promote their long-term career development instead of routinely offering premium pay rates. “We don’t buy talent,” Jones says.

    For its own staff and for the contract employees it places with clients, Yoh needs skilled workers with industry-specific backgrounds. “Our clients expect expertise that can hit the ground running,” Jones says. Although it considers active candidates who fit its profile, 65 percent to 70 percent of Yoh’s hires are passive candidates.

    “We look for individuals with good jobs who will consider changing careers for the right opportunity that can advance them to the next level,” Jones reports. “They are willing to leave their current employer for the right reasons.”

    The incentive Yoh offers to pull these passive candidates into its orbit is the potential for career advancement and exposure to quality opportunities at top companies such as Dell, Intel and GlaxoSmithKline that are doing state-of-the-art technical work. “Our contract consultants collect a premium for that exposure as they move forward,” Jones says.

    “We do a lot of succession planning, forward positioning and career development for all of our employees,” he notes. The discussions include their goals for compensation, advancement, growth opportunities and exposure to particular projects.

    One of the huge advantages of recruiting candidates who are committed to career development is that they stay on the job. Among the contract consultants Yoh places for projects that typically run six months to a year, 98 percent complete the assignment. “This is because we have done the due diligence to ensure that this is the right individual in the right placement,” Jones reports.

    Yoh takes a long-term view of staffing. “If we find a solid consultant who is employed on a project that will end in a year, we do all of our due diligence and quality checks on that consultant to build our database of professionals,” Jones says. “Instead of beginning with the job requirements and searching for a consultant who meets them, we find the best consultants and look for the right opportunities for them. This provides a choice of qualified consultants in a timely manner.”

    This long-term, candidate-centric approach not only holds down costs but also reduces bad hires and boomerang employees who are quickly recruited back by their former employer. The career development approach produces employees with a long-term perspective and closer ties to the organization, Jones says.

    Watson Wyatt research has found that the optimal approach to staffing creates a balance of internal promotions and external hires. “The key point is to anticipate when you will need workers so that you can begin to build the pipeline and promote people from within,” Hale says. “If you don’t take a proactive stance, you become desperate and have to raise pay to get the people you need. If you plan properly, you won’t need to poach.”

    Occasionally, a company may need a specific employee from a competitor to step up its own work, but real workforce planning minimizes the need for direct recruiting and the costs involved, Hale says. The best results at the lowest cost come from the right balance of direct recruiting of passive candidates, hiring active candidates when conditions permit, and internal development and advancement.

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