The bigger the job, the higher the cost of a bad hire. If you’re hiring a new C-level or VP-level executive for your company, the stakes of getting it right are much higher. In business, choosing a new leader is a make-or-break decision. Now more than ever, decisions can be made under intense time and cost pressure. Many organizations fail to recognize that investing in the search (for the new executive) upfront can mitigate the risk of making a bad hire and assure that you are receiving the best candidates possible.
We hear from many CHROs or Heads of HR that the decision to invest and partner with an executive search firm is an added “cost” that should be avoided and that their internal talent acquisition teams should be able to execute the search. CCI recently conducted a webinar, “Why the Heck Should You Do a Retained Executive Search?” and one of the topics covered is the cost of a bad hire. This critical topic presents a challenge not only when it comes to direct costs but also the indirect costs and impact that hiring a bad executive means to an organization.
A study by renowned economist Eileen Appelbaum and sociologist Ruth Milkman found that a bad hire can translate to as much as 213% of a c-suite level employee’s salary. So if your company hires an executive at $300,000, the total direct costs of a bad hire could exceed $600,000! Those direct costs include the compensation loss of base salary, sign-on bonus, any incentives, benefit costs, expenses, etc. However, they also include the cost of labor paid to the TA team to find and hire the executive, the cost of labor to interview the executive, and all other internal recruiting technology costs (LinkedIn, digital ads, ATS, etc.). Suddenly, the cost of hiring the right executive search firm, typically 1/3 of the total of the first year’s expected compensation, seems like a worthy investment! Sure, you could get lucky, but why leave your organization’s success up to chance? The smarter strategy is to mitigate that risk by investing and partnering with a reputable executive search firm.
As companies face a turbulent economy and high interest rates, the need for resilient and dynamic leaders is even more vital to a company’s success. While the money lost from a bad leadership hire is a concern, the non-monetary considerations of productivity, time, and morale are even more impactful. Every bad hire comes with indirect costs. Those trickle-down effects cause your business to lose money in other areas. At the executive level, the costs are multiplied:
Lost productivity
A bad leadership hire can mean declining sales, missed deadlines, and costly mistakes. It’s bad decisions that keep making bad decisions. All of them cost time and money to correct. If other senior-level individuals end up picking up the slack for the weakest link, their productivity will suffer too.
Lost time
A recent survey of CFOs found that managing underperforming employees takes up one whole day every week. Those costs are increased if your underperforming employee is at the executive level. Think about it; we spend 80% of our time managing the 20% of the underperformers. Imagine how much time it takes to manage an underperforming executive.
Lost morale
Regardless of seniority, every bad hire comes with a loss of morale. When someone can’t pull their weight, it puts more stress on everyone around them and can even drive valued employees to leave. When your bad hire is at the leadership level, morale costs exponentially increase. It can lead to “quiet quitting,” turnover, and a total lack of engagement.
A bad leader puts your whole organization in danger. Their poor decisions could cost the company customers or even damage your company’s reputation. Furthermore, removing the bad hire opens you up to a new set of risks. As long as their role is vacant, your company will be more vulnerable to external forces. A lot can happen in three months, including losing market share and forfeiting your competitive advantage. Vacant roles add to the costs through the loss of time and productivity.
So now that we fully understand the direct and indirect costs of a bad hire, how does partnering with a reputable retained search firm prevent this from happening?
- Reputable retained search consultants bring a search methodology, industry/functional expertise, decades of recruiting experience, and the dedicated resources required to map the market for talent.
- They focus on building relationships with executives who are passive and not active in their search, ensuring the very best talent who may not be looking is considered.
- They guarantee their work. If a search fails and the candidate does not work out, the search firm is required to conduct a replacement search.
- CCI Executive Search offers assessments and an option for executive coaching to onboard new leaders to bring them up to speed faster. This program has increased productivity by 53% for new leader hires.
- They conduct thorough references and have networks to confirm the experience of various candidates through back channels.
- Most importantly, good firms seek to fully understand the cultural nuances of the companies that hire them. A good search partner ensures that the style and leadership of each candidate will fit into the organization’s culture. This is the number one reason that leadership hires succeed or fail.
In the end, their expertise could save you months of work and a significant amount of money, all while finding you the right person to help lead your business.
Jeff Harvey
Vice President, Executive Search
CCI Consulting
