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Executive Recruiting Advice - Don't Underestimate The Cost Of A Mis-Hire

Posted on February 06, 2008

Effective, laser-focused executive recruiting is vital in any organization. Every CEO will agree that hiring and retaining high-quality executive leadership is crucial to achieving their strategic business goals. However, very few CEO's have accurate data to openly discuss the true cost of a bad hiring decision. Yet, when it does happen, it's too personal and too painful to study under a financial microscope. But, it's not a question of guilt or blame. The real question is, "How could it have been avoided and how can we reduce making mis-hires in the future?"

First, let's quantify the problem. Author Bradford D. Smart, PhD, concludes in his book, Topgrading: How Leading Companies Win by Hiring, Coaching and Keeping the Best People, "With an average base salary of $114,000, the average total cost associated with a 'typical' miss-hire is $2,709,000 - greater than 24 times the person's base compensation." And, this dollar amount increases or decreases as salary levels (and responsibilities) increase or decrease.

Using the formula provided by Dr. Smart, a bad hiring decision involving a $60,000 per year employee would cost the organization only $1.4 million, whereas a bad hiring decision involving a senior level $350,000 per year executive would cost the organization a staggering $8 million.

If you're trying to rationalize these amounts, think about the long-term "opportunity costs" that can result from sub-standard service, inadequate research, missed deadlines, failed marketing campaigns, missed sales targets, flawed accounting or investment strategies, and so much more. Once you dig in and begin to analyze the possibilities, it all starts to make perfect sense. In addition, you recruited the employee at considerable expense, you invested in their orientation and training, you put up with sub-standard performance and results for some period of time, and, adding insult to injury, you may have had to pay a severance amount to get the employee to leave. And finally, you incur all of the "hard" executive recruiting costs for the replacement employee, and you absorb various additional costs during the ramp-up of the new employee to their target productivity level.

It's clear that executive recruiting can become a form of high-stakes poker. But, what if you're a bit of a skeptic and you're thinking these costs are overstated?

First of all, I should mention that I have over twelve years of experience in the executive recruiting industry, and I believe these numbers are close to the mark. And, I have personal knowledge of captains of industry in Fortune 100 companies who likewise support these findings. But, go ahead. Cut these costs in half. Change 24 times salary to 12 times salary. Or, if you're really a skeptic, go ahead and cut them in half again. You can't escape it. Even at a mere 25% of the researched amount, you're still looking at a $2 million dollar cost for a bad hiring decision involving a $350,000 per year executive!

Over the years, I've had the opportunity to work with venture capital and private-equity backed healthcare companies as well as with multi-national Fortune 25 organizations to assist in the recruitment, selection and retention of key organizational leaders. And, along the way, it's been clear that most organizations simply don't attempt to measure the real cost of a mis-hire, although the company's leaders conceptually acknowledge the cost is significant. In fact, I've found that many corporations avoid the calculation by simply not agreeing on an appropriate formula, despite the fact imperfect information exists in all of their other decision making processes. It's too easily dismissed as just another "cost of doing business." But, I'm convinced this cost could be materially reduced.

Across industries, it's reported that internal corporate executives consistently recruit and retain the "right" manager or executive for twelve months or longer less than 55% of the time. This seems rather low and you'd reasonably expect professional executive recruiting firms to provide significantly higher results. However, industry experts tell us the average executive recruiting firm gets it right only approximately 65% of the time. And, it's this knowledge that drives us to consistently deliver thorough and measurable search quality outcomes for our own clients. We lead the retained executive search industry with a 91% twelve-month retention rate. Therefore, it's not surprising that an unusually high percentage of our annual revenues are derived from repeat business with past clients. We've proven that consistently high-quality executive recruiting outcomes are possible. We believe quality is always a solid business differentiator.

3 Ways to Improve Your Executive Recruiting Outcomes:

1. Using a retained executive recruiting firm is not always the correct answer to finding the key executive for your business or organization. Retained executive recruiting firms are excellent resources at the right time. However, internal candidates, board members and industry colleagues can be valuable resources in your executive recruiting efforts. These individuals may be candidates individually, they may be able to open their rolodex, they may provide comments about desired candidate characteristics, and they may recommend retained executive recruiting firms for you to talk with. If you use a retained executive recruiting firm, do your homework by interviewing the firm to understand who will work on the search, ask for specific examples of recent searches, ensure competency in thoroughly and accurately completing your search and inquire about the firm's quality outcomes, or metrics, to understand the true alignment between your company and their process.

2. Plan a thoughtful and well-prepared interview process. Each interviewer in your company's process must have a clear understanding of his or her role in the process in assessing the candidate's skill set, experience, motivation and cultural fit. The absence of interview structure will be recognized by the candidate and, more importantly, will lead you directly down the path to a costly mis-hire.

3. Ensuring that the new executive is successful requires consistent and regular communication between the hiring executive, the successful candidate and specific, internal colleagues. Managing the individual's integration into your company for the first 90 days will provide an excellent basis for long-term retention. Following the first 90 days, monthly and quarterly communication further develops relationships, provides clear strategic direction and reinforces cross-functional interaction and discussion.

At an average cost of $2,709,000 per mis-hire, I encourage all business leaders to take a closer look at their executive recruiting processes, determine where and how these processes lead to false economies and added costs, and then take reasonable steps to better manage these processes. A bad hiring decision can be a significant drain on the bottom line. But, here's the good news, it can be reduced.

Paul Frankenberg is President, CEO, and Principal in Kraft Search Associates, a retained Executive Search Firm specializing in the recruitment of high-value Executive Leadership throughout the Healthcare Industry. Paul has completed more than 225 Senior Executive and Corporate search assignments during his 12-year career and is known for search process thoroughness, commitment to project success, focus on client business plan achievement and candidate retention rates that are among the highest in the industry. Modern Healthcare magazine has ranked Kraft Search Associates one of the nation's Top 25 Healthcare Retained Executive Search Firms. Paul is a frequent writer, guest speaker and panelist on leadership, executive development, entrepreneurship and recruiting industry topics. Paul can be reached at Kraft Search Associates, LLC. The company's website is at http://www.kraftsearch.com and Paul can be reached directly at 615-782-4276.