Vanderbilt Business

Headhunter’s Advice: Manage What You Measure

RECRUITING

by Paul Frankenberg, EMBA'03 | Fall 2008, Inside Business | Comments | Print Print |

In his book Topgrading: How Leading Companies Win by Hiring, Coaching and Keeping the Best People, author Bradford D. Smart concludes, “With an average base salary of $114,000, the average total cost associated with a ‘typical’ mis-hire is $2,709,000—greater than 24 times the person’s base compensation.” 

To rationalize these amounts, think about the opportunity costs that can result from substandard service, inadequate research, missed deadlines, failed marketing campaigns, missed sales targets, flawed accounting or investment strategies and more. Additionally you may directly absorb considerable recruiting expense, invest in orientation and training, or put up with mediocre performance and results for some period of time. And, adding insult to injury, you may have to pay a severance to get the employee to leave. Finally you may also incur hard executive recruiting costs for the replacement employee and absorb various additional costs to train that person.

CEOs agree that hiring and retaining high-quality executive leadership is crucial to achieving strategic business goals. However, very few CEOs 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 you reduce making mis-hires in the future?

You’re Thinking These Costs Are Overstated?

With more than 12 years in the executive search industry, I believe these numbers are close to the mark. But go ahead and 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. Even at a mere 25 percent of the researched amount, you’re still looking at a $684,000 cost for a bad hiring decision involving a $114,000-per-year employee. For a $200,000 executive, you’re looking at a $1,200,000 cost for a bad hiring decision. The numbers are too large to ignore.

Over the years I’ve had the opportunity to work with VC- and PE-backed health care companies to Fortune 25 organizations. 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 decision-making processes. It’s too easily dismissed as just another “cost of doing business.” Across industries it’s reported that internal corporate executives consistently recruit and retain the “right” manager or executive for 12 months or longer less than 55 percent of the time. This seems low.

I’m convinced long-term candidate retention can be improved and that mis-hire costs can be materially reduced.

Three Ways to Improve Your Executive Recruiting Outcomes:

1. Recruiting firms are not always the right solution to hiring key leaders. Retained search firms are excellent resources at the right time. However, internal candidates, board members and industry colleagues can be valuable resources. 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 appropriate diligence on more than one search firm.

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 assessment process. The absence of interview structure will be recognized by the candidate and may lead you directly down the path to a costly mis-hire.

3. Ensuring that the new executive is successful requires 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 a foundation for long-term retention. Following the first 90 days, ongoing communication 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 then take steps to better manage these processes. A bad hiring decision can be a significant drain on the bottom line. 

 

Paul Frankenberg is CEO, President and Co-Founder of Kraft Search Associates. In both 2006 and 2007, Modern Healthcare magazine ranked Kraft Search Associates one of the nation’s Top 25 Healthcare Retained Executive Search Firms. Frankenberg can be reached directly through www.kraftsearch.com.

illustration credit: Mark Hoefer, mct

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