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Articles > The Staggering Cost of Mis-Hires #107 7-27-10

What is the cost of making a mistake in hiring?

Making a hiring mistake costs a great deal more than the income of the person you hired. That’s because the wrong hire affects much more than their position. The wrong employees in your company have a dramatic impact and influence on the right employees.   The same is true in reverse. “A” players attract “A” players. And "A" player’s leave when they become disenchanted by the incompetence of the "B" or "C" player that is managing them.   It can be argued that in your organization the cost of hiring the wrong person is more damaging at higher levels than it is at the lower levels. You can even argue that finding “A” players at the tactical level of your organization is most difficult, and make the assumption that you will never find all “A” players for your business. Of course that would be before you do the calculation we recommend on the cost of a mis-hire.   Why? Because if you fail to do this calculation you will never realize exactly what your underperformers are costing you.   Like so many other non quantified aspects of your business you will continue to run your business without the knowledge of how much profit is escaping in your business every day. How much can a mis-hire cost your organization? Most business owners are unaware of how much it costs when a poor decision is made on hiring someone. The cost for a mis-hire have been calculated at:

o   14 times salary for employees with a base salary less than $100,000:

o   28 times salary for employees with a base salary $100,000-250,000:

§ Long term opportunity costs for a mis-hire include:

o   sub-standard service

o   inadequate research

o   missed deadlines

o   failed marketing campaigns

o   missed sales targets

o   flawed accounting or investment strategies

o   and so much more

§ Even if your staff is largely tactical, unskilled labor, cost of replacement is at least three times* the salary or hourly wage for the term of the employee. [*Lowest government estimates for cost of mis-hire.]

Hiring the wrong person is an expense that has no boundaries. If you are truthful with yourself can you honestly say that you have nobody on your staff that you wouldn’t like to replace right now? Do an inventory on your current employees. How many are “A” Players [people who are in the top 10% of their capabilities for the position and compensation you are providing]? Do a quick assessment on how many “A” “B” “C” players you have. How many are below this grading? Arguably anyone below a “C” and any “B” players who are not ascending or not interested in improving would be candidates for replacement. The cost of a current hire that should be replaced is a continuing expense that persists and adds to the enduring damage this person is causing. That doesn’t account for the missed opportunities that you may be suffering as well. The point of this newsletter is to get you to quantify a recent mis-hire to assess how much damage and expense resulted from this mistake. It should accentuate the need to put new methodology and processes in place to improve your hiring and recruiting practices so as to avoid mis-hires in the future.

Recently one of my clients, who’s been having difficulty finding the right people and who just recently made a mistake in hiring a production manager for his firm, used the Cost of Mis-Hire tool to estimate the costs his business incurs when they make a hiring mistake. The result? For a tactical position on the floor of his manufacturing company he calculated his costs at $1268. For the mistake he made on his production manager the cost was staggering, $71423!

Only by putting an actual cost on your hiring mistakes will you begin to recognize the need to make improvements in your hiring practices. Only by putting a number on the cost that your current mis-hire mistakes are still costing you will you begin to make changes in the type and quality of the individuals you have working in your business.

How much is mis-hire costing you if you don’t replace them? Bradford Smart, author of Topgrading estimates that if you “live with” your current mistakes [keep your present staff just as is] you can cut your costs for a mis-hire by ½. Of course this means you continue to have these costs rather than replacing them with an A player, improving performance and ridding yourself of these costs.

Many companies feel it is too disruptive, painful, and costly to replace current underperforming employees. They feel the revolving door experience is too unsettling and expensive.

The key to making this formula work is adopting the Topgrading system. Using Topgrading-based assessment, the cost of mis-hires is only 3-4% of costs using typical assessment approaches.

Whether you estimate your cost of mis-hire at the high end or low end of these estimates the reality is that in order to succeed in business you need top performers.   Systems are essential for getting your people to perform consistently and predictably, yet you need good people to help you develop system, and there’s no question that good people perform at an even higher level when coupled with a great system.

If you’ve not done a calculation on the cost of a mis-hire in your organization I urge you to do so. It will magnify what it costs you to live with a recruiting and hiring system that is not providing you with the right raw material to produce the outcome you expect. In addition to this wrong hiring decisions are not rewarding for the individuals hired. Displacing employees is not a happy occasion, and it’s one reason why we live with our mis-hires longer than we should. Determine your cost of a mis-hire and then get busy developing a hiring and recruiting system that will put the right people on the front line of your business. You’ll achieve success much faster. 

If you’d like help on developing an effective hiring and recruiting system please contact Positioning Systems.  

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