Do you know how much it costs you when you hire the wrong person? We have researched this topic for decades, and during all those years we’ve found that executives grossly underestimate the costs of bad hires… until we hand them the Topgrading Cost of Mis-Hire Form and they systematically estimate the costs.
Our research on the costs of bad hires has been published in all 3 editions of Topgrading. This blog just provides a brief summary, along with an important recommendation on how to minimize these costs.
Our Cost of Mis-Hire form breaks down the costs of a bad hire into dozens of factors such as annual comp, cost of hiring, cost of maintaining the person in the job, mistakes/failures, disruption, etc.
Here are typical results. The average cost of mis-hiring:
- a sales rep earning a $100,000 base is $500,000+, or 5 times base comp.
- an upper level manager is 27 times the base comp according to the Chief Executive Magazine research.
Those are the dollar costs. In asking companies to estimate “time wasted” on a bad hire, those results are scary. The upper level managers commonly say they waste about 200 hours on a bad hire. When the bad hire was C-level and we have a full executive team in the room, they ALL estimate their time wasted, and the wasted time shoots up to 1,000 hours. Here’s why: asking how much the bad hire caused time to be wasted isn’t technically accurate. It’s necessary time to prevent mistakes and to correct mistakes. Suppose the VP Sales lost 2 key accounts. Until the bad hire is replaced, a LOT of time has to be devoted to keeping and salvaging accounts.
CHIEF EXECUTIVE MAGAZINE ADDS TO THE CONTROVERSY
Chief Executive published an article entitled “The Costs of CEO Failure,” using our Cost of Mis-Hire Form.
The Chief Executive analysis took our basic model and then showed how at the CEO level the costs skyrocket! Bottom line, the average cost of a CEO of a large company is $53 million, for a mid-range company is $22 million, and for a small company is $13 million. The average for CEO mis-hires is 27x comp. Appropriately, the writers noted that when there is a CEO change, 25% of the other executives depart – zoom, the costs go up. And there are 6-figure signing bonuses; zoom, the costs go higher. And the average severance is 3 times annual salary for large companies, 2 times for mid-sized companies; more zoom.
So as to not be accused of hyping the data, in my cost of mis-hire research I’ve always accepted “zero” as the cost of disruption, with respondents typically saying the cost of impaired morale and trying to figure out new directions must be high, but too hard to guess at. The Chief Executive authors put pen to paper and came up with high numbers for “disruption.” Good for them! Zoom, up go the mis-hire costs.
And those high costs of mis-hires do NOT include the cost when the stock declines. Booz Allen Hamilton research shows an average stock decline of 10%+ when there is a CEO change of a company that has been doing well. Can the seriousness of mis-hires at the top get any worse? Yes!
The Chief Executive authors add some startling statistics: 64% of CEOs fail to achieve the objectives for which they were hired. And get this – only 37% of CEOs have previous CEO experience.
I met for a day with the top executives of a company that Topgraded very well… until they mis-hired a Chief HR Officer who let Topgrading evaporate. The top team figured that with the disciplines of Topgrading NOT used, 5 serious mis-hires resulted. And the CEO noted several times that after years of industry leadership in stock performance, the 5 bad hires caused the stock to decline 10%. As he put it, “Taking our eye off the Topgrading ball cost us $500 million in market cap. Needless to say, Topgrading disciplines were implemented, and after two years the stock is once again at a record high.”
Conclusion: With costs of bad hires increasing, Topgraders need to measure not just the results – the percent high performers hired – they also need to measure the extent to which the methods are used conscientiously. When corners are cut, bad hires result – costly bad hires.