How Much Is a Bad Hire Costing You?
If you are at the C-level (or even the VP level), you are responsible for hiring, retaining, and managing an executive team, and it is important for you to know how much bad hiring can cost you. Let’s assume that you will be an executive for 20 years, at 5 different companies (avg. 4 years each), with 6 direct reports. That is 30 hiring / retention opportunities. By the way, retaining a B or C player instead of making sure you have all A-players, is just as costly as bad hiring of new people. Let’s further assume you are really good, and get it right 80% of the time (average exec actually hits about 57%). So, with 30 reports, and a 20% error factor, you are likely to have 6 bad team members over your 20 years as a managing executive.
What will the financial impact be of those bad hires? If you are at a $50 Million company, aiming for 10% growth, let’s say that a bad exec team member merely lowers your success rate, so you only hit 8% growth instead of 10% growth. You aren’t getting fired for that, and probably no one else on your team is getting fired either. But at $50 mil revenue, a 2% loss in growth is $1 million! Granted, revenue is not EBITDA, but over 20 years, that may cost your owners $20 million in lost revenue. That could be equal to $20 million in equity, since 5x EBITDA is often about 1x revenue.
Is this important? After all, you would have gotten $4 mil /year in growth (vs. $5 mil), so you might have achieved $80 million in revenue / potential equity increases (vs $100 mil if you were perfect at hiring) after 20 years. OK, fair enough. But what if you are in fact wrong 40% of the time (closer to the average), and you tolerate 12 so-so people out of 30? Then, the problem compounds. Instead of missing 40% of the expected revenue increase, you might not get an increase at all if 40% of your team is missing in action, marginally effective, etc.
This example of lost growth revenue is of course just the tip of the iceberg. In addition to lost revenue, a mediocre team could be failing you on on-time delivery, escapes, customer satisfaction, employee relations (leading to poor utilization and turnover), and a myriad of other operational problems that all cost big money. How do we know? These are the performance objectives we get from our clients when we develop position profiles for new executive hires! When employers replace the poor performers, these are the costly problems they seek to fix. You must also include time lost by you and the good performers on your team, who often waste productivity trying to get the poor performers up to speed.
In addition to the costs associated with the impact of a poor performer, there are also the actual hard costs of a bad hire: recruiting fees, candidate travel, relocation, sign-on bonuses, severance, actual salaries paid, and the unpredictable cost of a potential lawsuit.
If you are a regular reader, you have seen our many articles on hiring the right way, to avoid these potentially costly mistakes! Feel free to request reprints and visit our website to see our comprehensive program for smart hiring.