The 2X Factor: The Real Cost of Bad Hiring

I’m going to make the case that the cost of a bad hiring decision for most positions is 2 times (2X) the person’s annual salary. This is not a one-time cost either. It happens year after year. That’s a lot of money. You’ll use this information to become a better recruiter. Here’s how:

  1. You’ll get more time with hiring managers to prepare real job descriptions. Who wouldn’t give you more time if you could show that the trade-off was $100,000 to $200,000 per year in cost savings?
  2. You’ll get your boss and senior management team to add more resources to the recruiting department so you can ultimately do a better job. Who wouldn’t hire an extra recruiter or two, if you could convince them that the cost savings for just one recruiter doing a better job on just five to six assignments per year resulted in a $1 million cost savings each year?
  3. You’ll have time to become a better recruiter, since you’ll be doing more recruiting and less admin. This means you must invest in yourself to get better. Don’t leave it up to someone else to send you to some training course or conference. You should do this anyway. This is trait of all top performers. It’s no different if you’re a recruiter.

Now on to proving the 2X Factor: the annual cost of a bad hire or savings for a good hire. First off, some people would contend that the cost savings or impact of hiring a top person is much higher than 2X the annual salary. They could be right. For example, hiring a super star in any field (e.g. a top salesperson, engineer, manager, CEO, or developer) can have an impact far greater than 2X. But while obviously true, the likelihood that a company can consistently hire top 10% people in every position is low. More realistic is the likelihood that companies can hire the top third for every position, and stop hiring the bottom third. It’s my contention that doing this will have a 2X cost savings impact. If, for example, you hire a top-third office manager at a $50,000 salary, you’ll save $100,000 per year by not hiring a bottom-third office manager at the same salary. This cost savings impact is probably higher for more senior-level positions, but for now let’s stay with non-managerial positions. Let’s start by defining the characteristics of the top third in comparison to the bottom third. For one thing, the bottom 10% is not part of the bottom third. The characteristics of a really bad hire are pretty easy to spot ó lack of ability, lack of motivation, and a bad attitude. It takes no training to spot these people, so if you have ever hired one, you probably shouldn’t be interviewing. But that’s another article. The typical bottom-third employee is one who is basically competent but requires too much pushing or coaching to achieve average performance. They might have weak people skills or a bad attitude. They tend to be inflexible, talk too much, learn slowly, listen too little, get by on personality rather than hard work, are obstinate, de-motivate others, or constantly require additional support. These people suck the energy out of the team just be being there, slowing everything and everyone down. The top-third employee is totally different. These people are quick learners and become independent quickly. They require less management support and direction. They consistently achieve their performance objectives on time and on budget. They have a positive attitude. They cooperate easily with others, and are a pleasure to work with and for. Some are good followers, some good leaders. They tend to be flexible, can handle adversity, listen well, and work hard. As a minimum, the top third makes everyone they work with better, while doing a great job at what they’re required to do. I’ll contend that for any non-managerial job hiring the top third and not hiring the bottom third is worth a least two times (2X) the person’s annual salary. This is in the form of extra productivity, improved team performance, higher quality work, and less management time. I’ll use two separate approaches to make the case, the first one statistical, the second empirical. Why Bad Hires Cost Your Organization So Much More Most unregulated processes in most companies follow a normal bell curve, not too flat and not too tight. A tall and thin bell curve indicates great process control, and is very typical of a Six Sigma process. A flat curve is indicative of a random process, with people pretty much doing their own thing. Hiring falls somewhere in between. If you remember your statistics course you know for a process like this, the average of the top third is about 1.35 times the mean, and the bottom-third is about .65 times the mean. If you were using some type of productivity measure, like sales, this means that a top third sales rep out bills the bottom third by approximately 2X (1.35/.65). For sales this is easily provable. How does your company rank on this measure? Under this scenario, if the average sales rep bills $500,000, the top third would bill $675,000, and the bottom third $325,000. The profit generated from this sales difference is approximately 2X the salary of the average sales rep. While more difficult to prove, our studies indicate a similar 2X pattern holds for call-center reps when handling calls, for the quality and quantity of code written by developers, and even for sourcers finding good candidates. For specific proof at your own company just take any position where you track actual performance. Then compare the top third to the bottom third. If you’re company is great at hiring you’ll find less variance, and probably more than a 2X difference if you’re weak at hiring. Using individual managers as benchmarks can also help here. The best managers consistently hire top people, and the worst have wide variances. The key is to use the basic bell curve approach to prove your company’s actual cost of bad hiring. I suspect you’ll find the 2X factor at play. I don’t want to be too rigorous with the empirical analysis, but here’s a good rule of thumb to follow: assume that an average hire pays for herself every year, a bad hire results in a net loss equivalent to her salary, and a good hire is a net gain equal to her salary. Under this assumption, the net cost of a bad hire is again the 2X factor. To validate this, assume that the bottom third requires 10% more management time and has a negative 10% impact on team performance. This alone is a 50% cost increase if there are three other team members and one manager (the manager earns more). Adding in the annual cost of additional training (10%) and lost individual productivity (30-40%) results in a cost premium of 100%. In other words, if you hire a top-third person you gain 100% of their salary, and you lose 100% if you hire the bottom third. This is 2X. While a 2X factor seems about right for most non-managerial positions the cost impact would be greater for more critical jobs, those that involve bigger teams, and for all management positions. Making sure you hire the top third rather than the bottom third involves a two-step solution. First, don’t hire weak candidates. This is part of the assessment process. Second, see more top people. This is a sourcing issue. Confusing assessment and sourcing is a typical trap many companies fall into. The solution to bad hiring isn’t just the implementation of an interviewing training program. To improve the assessment process, managers need to shift their hiring decision criteria away from skills and presentation towards performance and motivation. Defining the real job and using some type of structured interview process is all that’s necessary to handle this part. If you want to hire more top people, you’ll need to see more top people. That’s why the second half of the solution is sourcing related. The top third are generally less active. To attract this group you’ll need to shift your emphasis away from traditional job board advertising towards more compelling advertising, the use of job branding, more targeted advertising, and a leveraging of your employee referral program. While job board advertising can be part of this, you must get very creative and treat the sourcing process as a consumer marketing process, not an administrative one. If you’re into statistics you can summarize this two-step process as follows:

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  1. Use a more structured performance-based interviewing approach. This reduces variability in the hiring process. This is process control; it prevents stupid hiring mistakes. This is also where Six Sigma can help.
  2. Treat sourcing as marketing. This improves the quality of the candidate pool by shifting the whole curve and improving the quality of even the average candidate. This is a process improvement effect, and has nothing to do with Six Sigma. At an extreme example, imagine if you were only seeing top candidates ó it wouldn’t matter if you were bad at interviewing. In this case, even your weakest managers would be would be hiring good people.

It doesn’t take much to make hiring the top third a systematic process. It’s worth it ó worth 2X the person’s annual salary in fact, not just once, but each and every year.

Lou Adler is the CEO and founder of The Adler Group – a training and search firm helping companies implement Performance-based Hiring℠. Adler is the author of the Amazon top-10 best-seller, Hire With Your Head (John Wiley & Sons, 3rd Edition, 2007). His most recent book has just been published, The Essential Guide for Hiring & Getting Hired (Workbench, 2013). He is also the author of the award-winning Nightingale-Conant audio program, Talent Rules! Using Performance-based Hiring to Build Great Teams (2007).