The Financial Impact of Not Hiring the Least-best

DollarSign2_000 The financial gain of hiring A-level talent is probably 10-100 times the person’s compensation.

The financial cost of hiring a walking lawsuit is probably 10-100 times their compensation.

Assuming the duds and the stars represent 10% of your total hires, it’s what you do with the other 90% that really matters.

To get a sense of the enormous financial impact of shifting people from the bottom half into the top half, first categorize the 90% into three big buckets — the Best, the Not Quite Best, and the Least-best. Based on these definitions they should be of equal size:

The best, or upper-third. These people represent the foundation of your company or organization. They work hard, frequently exceed expectations, do more than asked, achieve high-quality consistent results, can always be counted upon, need little direction, never make excuses, work extremely well with everyone, and can take over projects even when they have less expertise than normal. As a result they get promoted at a faster rate. If your hiring process is flawed, you won’t have enough of these people to grow your company.
The not quite best, or the middle-third. These are the partially competent. Generally they’re strong technically, but missing a key ingredient or two. On the other hand, they get the job done with limited direction, can be counted on in a crisis, work reasonably well with others, and get promoted when there’s no one else around, but they’re generally not the first choice. Sometimes they get hired because they seem safe.
The least-best, or the bottom-third. These are the people who just don’t fit somehow. Sometimes they’re good people in the wrong jobs. They need extra coaching and supervision to achieve average results. Often they cause unnecessary conflict. They are often hired because they interview well, are enthusiastic and affable, and have the requisite experience. If this group represents more than a third of your workforce, you have a real problem.

What’s surprising about the middle and bottom groups is that when they were hired they all seemed fully qualified. They all had the right experience, the right academics, and the right skills. Many of them even had the right behaviors and competencies specified on the job description. However, something happened after they were hired that caused a great many of them to underperform. This is typically due to lack of interest in the work, weak relations with the hiring manager, lack of team skills, poor cultural fit, and inconsistent work habits.

The cost of hiring these least-best people is enormous. To gain a rough sense of this first calculate the average profit per new employee (APE) for your company by multiplying your revenue per employee (RPE) by a reasonable estimate of contribution margin. This is probably around 30-40 percent.

So if your RPE is $400,000, your APE at a 30 percent margin is $120,000. This means that on average, each new employee should generate $120,000 in pre-tax profit if as a group they’re doing work similar to your existing employees. Of course, this doesn’t take into account different jobs and different salaries, plus a lot of other missing stuff, but it’s still useful for making a point.

Now assume the top group is 20 percent more impactful than the middle group and the least-best is 20 percent less impactful than the middle group. This means the top group generates $144,000 each in profit (120*1.2) and the least-best group generates $96,000 each. The difference between the top group and the least-best group is therefore $48,000 in pre-tax profit per person per year. This means that for every person you replace in the bottom-third with a top-third person you’ll make an additional $48,000 profit. If you do it 100 times, you’ll earn $4.8 million in additional pre-tax profit. (Here’s a summary graph of this for a number of companies ranging from Goldman Sachs at the high-end to government contractors at the bottom.)

Using this macro-level analysis, it’s pretty easy to justify implementing a top-third hiring strategy. Pulling this off, however, is not that easy, and there are no silver bullets, other than being best-in-class. So if you’re not in this category and if your supply of candidates is far less than your demand, you’ll have to reengineer most of your processes to hire the top-third. Here are some quick ideas on how to get started.

Sourcing. The top group doesn’t look for new jobs the same way the bottom group does. Most likely they initially heard about your openings through a referral, recommendation, or by networking with a recruiter or current employee. If this is the case, it makes sense to expand these efforts and minimize efforts on those channels that attract the bottom-third. Before eliminating job boards altogether, however, find out what kind of messaging appeals to the top-thirders. Generally this involves career growth and learning opportunities, challenges, and the chance to make an impact. Write some ads emphasizing these points, use search engine optimization to make sure they’re found, and track the performance of different major and niche boards. Then keep the ones that actually attract the-third. Of course, in the future, make every new sourcing vendor prove they can attract the top-third. The key to all this is to use top-third decision-making and consumer marketing to drive your sourcing channel strategy, not some new vendor of the week.
Recruiting. In general the least-best are looking for jobs and those in the top-third are looking for careers. (This is probably the primary reason for variations in on-the-job performance, too.) Looking for a job is much more transactional than looking for a career. Those looking for a career have more informational needs and questions than the bottom-third, yet they’re often overlooked in the rush to start posting boring jobs and arranging interviews. To allow more top-thirders into the process a new and formal information exchange step needs to be inserted before the application process. Good recruiters do this naturally, but formalizing it would increase the number of top people involved by widening the top end of your prospect funnel. At the back end, you can increase the number of top-third hires by providing finalists a score sheet that allows them to formally evaluate your opportunity across a broad range of short and long-term criteria (e.g., growth, learning, impact, team). (Email me if you’d like a sample form.)
Assessing. While you can eliminate most mistakes using traditional behavioral interviewing, discerning the differences between the top and bottom thirds takes more investigation. Being fully qualified doesn’t mean being fully motivated, or being able to work in your environment, or working well with the team and hiring manager, or being well-organized, timely, committed, consistent, or flexible. These are the typical causes of underperformance, and ignoring them is a setup for failure. To determine if someone is in the top-third I suggest creating a performance profile to define real job needs, digging deeply into comparable accomplishments using the one-question interview, and using the 10-factor talent scorecard to collect and assess the evidence.

From a practical standpoint it’s unlikely you could ever successfully implement a hiring process to hire only the top 5 to 10 percent. However, hiring the top-third is a reasonable and sustainable target. It would certainly raise the talent bar at an insignificant cost and a huge ROI. It all starts by letting the needs and decision-making criteria of the top third drive your sourcing, recruiting, and interviewing processes. As far as I’m concerned, being in compliance doesn’t mean being ineffective. In most cases, this is just an excuse to maintain the status quo.