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Cost of Error

The cost of a bad hire for senior executives is almost incalculable.

Image courtesy of Unsplash.
Image courtesy of Unsplash.

Have you ever found yourself thinking, “This person is not quite what I hoped for, but we are really shorthanded so they will have to do,” when recruiting? It is tempting. Many times when looking to hire a new team member, you are at your busiest as you strive to cover the vacancy, and this adds to the pressure.

Or, have you ever put up with a poor or mediocre hire just because you haven’t the time or bandwidth to tackle their dismissal followed by a lengthy search? It’s not unusual.

If you have ever done either, then have a good look at the cost.

This might convince you to never do this again.

To set the scene, let’s first consider the cost of hiring mistakes.

Industry estimates put the cost of a bad hire as somewhere between 1 and 2.5 times the person’s annual salary. For salespeople, the true cost is, in fact, considerably higher when you build in opportunity costs. Our estimate, based on experience, is that this falls somewhere between 10 and 25 times the annual salary. The cost of a bad hire for salespeople is worrying; the cost of a bad hire for senior executives is almost incalculable. You are putting at risk the future of the organisation and its growth, shareholder value, and reputation. Also, it is harder to measure. You might not even know the cost of the damage of a poor senior executive hire since you will not know what you might have achieved with a strong hire.

Before exploring cost elements, it’s important to differentiate between a “bad hire” (one that you spot and deal with in a timely manner) and a “poor or mediocre hire” (one that you tolerate within the organisation for many years to come). Interestingly, it is the poor or mediocre hires that cost the organisation the most, and yet they are the most difficult to mobilise management to deal with.

Certainly, I know from my days in HR that tolerance of mediocrity was a costly and damaging phenomenon among some managers. There are a number of reasons for this:  managers are very busy; it is an important but not urgent activity so it slips to the bottom of the priority list; nobody likes to give bad messages; people become integrated into the organisation and managers worry about the impact of removal; the philosophy of “the one you know is better than the one you don’t”; the list goes on. A significant part of this is the sense of dread and exhaustion many managers feel about having first to cover the resulting vacancy and second to hire the replacement. In some organisations, fear that the replacement hire will not be sanctioned due to cost-saving measures or hiring freezes can be a major stumbling block as well.

I developed a few tricks to address this issue.

  • Reward managers who tackle mediocrity with a guarantee that they will be allowed to replace underperforming employees with a stronger, more suitable candidate. This is particularity important when the organisation is under cost pressure. Managers fear that if they fire a team member they will not be able to replace the person, and thus cling to mediocre staff on the basis that someone is better than nobody.
  • Help managers work out the lifetime cost of continuing to employ the mediocre employee. Don’t worry about opportunity costs, lack of productivity, lack of creativity, etc. When working out this number, it is safe to assume that this person will not voluntarily leave and will therefore be with the organisation for many years to come. Using 25 years and an average salary of $40,000 (let’s be conservative) and a 30% overhead, and you easily get close to $2,000,000. Ask the manager (or yourself) if you would prefer to invest $2,000,000 in this individual or someone new. You might be pleased with the answer.

You can work out your own costs of a potential hiring mistake using the checklist below. Costs can be broken down into six broad categories:

  • The cost of hiring the person
  • The direct compensation
  • The cost of employing the person
  • The cost of exiting the person
  • Opportunity costs
  • Impact or disruption costs

The preceding is adapted from The Right Hire: Attract And Retain The Best People by Lisette Howlett ©2018 by Sandler Systems, Inc. and published with permission from Sandler Training.

You may learn more by visiting https://www.sandler.com/sandler-books/the-right-hireto download a free chapter from The Right Hire.

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