Not With My Budget, You Don’t! Part 2

In Part 1, we discussed the fact that high job performance is not the norm ó and that this is very expensive. We also explained that some of the major reasons for this are the diffusion of responsibility and unclear expectations. In Part 2, we’ll discuss why it is human nature for people to diffuse hiring responsibility, how much it actually costs the organization, and why only a few people will choose to do something about it. Balance of Consequences People tend to seek pleasure and avoid pain. A pain that is highly personal, highly certain, and immediate tends to get our attention more than one that is impersonal, uncertain, or delayed. The same goes for rewards. Personal, immediate, and certain rewards are very attractive. Let’s see how this plays out in hiring. A line manager with an open position is measured on productivity (the reward is personal, certain, and immediate). A recruiter is measured on open positions and time to fill (again, the reward is personal, certain, and immediate). Both people share the same need to fill the job quickly, but that is where the similarity ends. The line manager needs a high performer, while the recruiter only needs to fill an open work order with an acceptable candidate. Most recruiters working with unclear job requirements and, using interviews as their primary hiring tool, are able to average one placement for every four applicants. This means the recruiter receives a personal, certain, and immediate reward for filling a position fast. But this practice delivers 50/50 accuracy, meaning our line manager receives an uncertain, delayed reward of a possibly high-producing employee. To repeat, the recruiter received a quick payoff for placement, but the line manager lives with iffy consequences that may take months to see. When recruiters use explicit job requirements and accurate screening tools, the responsibility for employee quality shifts from the line manager to the recruiter. Recruiting ratios usually increase to one in seven. Recruiters now have to work harder, but line managers can enjoy the benefits of higher, more consistent employee quality. In short, the recruiter suffers personal, certain and immediate pain in exchange for a reward that will benefit the organization. Anyone up to the job? Is it any wonder some recruiters are happy just to get people to stay for six months? There are more certain rewards and less pain to a “filling seats” approach. But suppose, just suppose, that some maverick recruiter is up to the challenge. Just how much will better front-end screening benefit the organization? And how much money will it generate? Hiring Accuracy Means Money Experts in the field have done a lot of work in this area. They call it “Utility Analysis.” As you can imagine, utility analysis can get pretty deep, but we’ll just borrow a few basics. (As usual, I’ll beg my colleagues’ forgiveness for oversimplifying a highly complicated concept). First, we’ll reiterate some basics:

  1. Fully job-qualified employees tend to produce more
  2. Screening out unskilled applicants is a good thing
  3. The quality of a hiring system depends on its ability to predict future performance

Got that? Ok. Now let’s look at some common hiring history:

  • Organizations using traditional interviews (with an estimated predictive validity of .20) usually hire about one in four applicants (25%).
  • Organizations that use a combination of hiring tools (behavioral interview, mental test, and simulations have a combined estimated predictive validity of .60) tend to hire about one in seven applicants (about 15%).

Plugging these numbers into a table found in almost every personnel psychology book shows that using this kind of hiring system raises the percentage of new hires who would be rated “successful” by about 30%. Financially this means that, instead of having 50 out of 100 people in our top-performing group, we now have about 80. To get the rough dollar value, all we have to do is multiply $24,000 per person by 30 people, for a net increase of $720,000 each year. If these people were sales, managerial, or professional, the figure would rise to $1,500,000 (30 x $50,000 x 70%). Better front-end screening (i.e., recruiter pain) translates directly into higher back-end rewards (i.e., line manager rewards). Too bad many HR departments choose to dodge this bullet. Not With My Budget, You Don’t! It will always take more time, energy, and effort to screen out unqualified applicants. Even though the organization will significantly benefit in the long run, HR often resists hiring an additional person or spending more money on tests (these represent personal, immediate, and certain “pain” accompanied by organizational, uncertain, delayed rewards, remember?). So why don’t we all admit that our human nature says it is okay to charge bad-hire money to someone else’s budget, just so long as it doesn’t affect our workload or overhead? We can read all about recruiting, retention, and client management. These are all noble goals, but how many people actively resist doing more work in the front-end even though it will produce better people in the back? Conclusion Here are some conclusions you could take from this information:

  1. Mediocrity, not excellence, is the norm.
  2. If your organization cannot separate potentially high performers from low performers in the hiring stage, your hiring system is flawed.
  3. If your organization does not have a clear idea of what is required in all four job-skill areas for all jobs, it will probably overlook critical requirements.
  4. If your hiring system does not accurately measure applicants in all four areas, it will “pass” too many unqualified people.
  5. It’s easy to let line managers take the rap for bad hiring decisions.
  6. If you don’t examine hiring success and calculate the cost of low performance, no one will ever pay attention.
  7. There is no way around it: HR always has to work harder in order make line managers’ jobs easier.
  8. The accuracy of a hiring system to predict high performance is directly linked to bottom-line profitability.
  9. Just like a sports team, if you don’t care about winning or losing, any selection system is fine. But if you want to play in the Olympics, you need Olympic-class tryouts.
  10. Initial selection, more than any other function, has the greatest impact on organizational performance of any other system. Unfortunately, many hiring practitioners totally miss this opportunity.
  11. Good hiring tools and bad management practices are a volatile mix. If managers are incompetent, it is better to hire incompetent employees. Highly skilled employees won’t work for bad managers.
  12. Keep reading all you can about developing good client relationships, finding passive candidates, and retaining people. It won’t help much, but it makes nice press!

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