The Cost of Mis-Hires

According to Dr. Brad Smart of Topgrading fame, “the average cost of a mis-hire can be six times base salary for a sales rep, 15 times base salary for a manager, and as much as 27 times base salary for an executive” (Paper 360°, January 2008). Dr. Smart’s calculations depend on certain assumptions for setting the price of missed opportunities and organizational disruption. The price one has to pay for missed opportunities and disruption increases the higher up one goes in an organization, of course. He notes that the mis-hire of a CEO in a large organization can cost much more than 27 times base salary.

Are these numbers believable and applicable to your business? To answer this question, it’s necessary to think about what any given employee contributes to your organization’s top line: the employee’s economic contribution to your organization. For example, if you have a salesperson, what sales are attributable to the activity of that person? If that person is an average performer, what is the difference between their sales figures and the sales figures for an outstanding performer? You can start to appreciate that the cost of a mis-hire can be significant and this is before adding in the cost of managing an average performer and trying to improve their performance OR the accumulated cost of missed opportunities (sales that beget future sales).

If this does not start you thinking that the cost of a mis-hire can be significant, think about the times a below-average employee makes a mistake or doesn’t do his/her job as expected. What are the costs associated with mistakes and managing below-average performance? What are the costs of having to redeploy or let go of under-performers? What are the costs of a sub-par manager poorly managing all the people who report to him/her?

The point is the cost of mis-hires can be significant. The solution is to have a strategy to hire only the top-performers for any given position. More to follow on the strategy but in the mean time, please think about the difference between running an organization with all top-performers and one with only a few: the difference in the economic performance of your organization is the true cost of mis-hires.