Pay games: Figure out how much a bad hire costs you
Nashville Business Journal - June 18, 2004 by Paul Frankenberg
"With an average base salary of $114,000, the average total cost associated with a 'typical' mis-hire is a little more than $2.7 million - greater than 24 times the person's base compensation."
I was skeptical but compelled to do research when I learned that the former vice chairman of General Electric, the chairman and CEO of Allied Signal, the chairman of Gateway and the senior vice president of HR at GE each supported this statement.
Other highly regarded executives commented that they believe the numbers are greater than $2.7 million. The research conducted to analyze the numbers and the book where they're presented are in "Topgrading," by Bradford Smart.
The components of the calculation include: base compensation, number of years in the role, the cost in hiring, compensation for all years, cost of maintaining the employee, severance, mistakes and failures, wasted or missed opportunities and the cost of disruption.
Was your initial reaction, "No way this number is real?" For the sake of discussion, let's say you are right. Let's say that this number is too large and that a mis-hire doesn't cost your company 24 times the base salary. Let's agree on the basic premise that the overall research is grossly overstated.
But what if the real cost is only 75 percent, 50 percent or even 25 percent of $2.7 million? That is still a large number when you multiple it by the number of mis-hires your organization has made in the last six months or last three years.
As an executive recruiter, I have the opportunity to work with a variety of companies. Most don't track the real cost, although they perceptually recognize it as significant. Many say they avoid the calculation simply because senior management doesn't agree on a formula that works across the board.
I find those comments to be startling. Imperfect information exists in all decisions. However, there's tremendous value in thinking through the concept to get your hands around the issues and costs.
For instance, what does it cost a retail company to hire a store manager who has poor people skills and manages to run off one client per month? What does it cost a health care provider who employees a physician with solid clinical skills but poor people skills?
What does it cost a company if the VP of marketing introduces a "dog" products to the market? What is the cost if an employee causes a company to miss a deadline to bring a new product to market? What does it cost a company that lets a senior executive go and receives negative press, a stock price drop, or creates a sense of uncertainty among the company's customers and vendors?
People are busy and when you need someone, you are focused on filling that hole. You want to put someone in place that is competent so you can focus on your growing list of responsibilities. However, too often, the short-term fix becomes a long-term problem.
Retaining a search firm isn't always the right answer to solve this issue. Begin by reviewing your internal processes and then understand when and how you use outsourced solutions. Hiring practices are broad and should be looked at individually and as a whole. After all, statistics show that a good number of employment situations result in a mis-hire: the wrong person for the wrong job.
Consider whether you have the internal resources to handle your recruiting and hiring. If so, do you have good people managing those processes and interacting across business departments? Do you delegate hiring to HR or do business managers view hiring as a core responsibility of their department and then work with HR throughout the process?
When you work with a search firm, how do you decide which firm to use? Do you check client and candidate references? Do you discuss how the firm will conduct the search? Do you consider how the firm will represent your company?
Do you ask for the time to bring forward candidates and then consider how your organization will initiate and coordinate the internal interviews and hiring? The cost of not asking these questions is significant.
We agree that the costs of a mis-hire are high. However, $2.7 million may appear inflated or the components of the number are too broad for you to take a real interest.
Whatever your response, I encourage you to think through the issue and begin to understand your company's specific components and the correlating results.
This exercise will force you to ask questions and find answers - $2.7 million, or even 75 percent, 50 percent or 25 percent of $2.7 million is too large a number for you to do nothing.
Paul Frankenberg is president of Nashville-based Kraft Search Associates. paul@kraftsearch.com, 615-782-4276
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