It turns out that the actual cost of hiring people who wind up in the bottom half is at least $100 thousand per bad decision and for managers it’s a big multiple of that! This is based on the fact that the average revenue per employee for those in the Fortune 500 is $1 million with a variable margin about 40% or $400 thousand.
For example, as shown in the graphic below the average cost of hiring a person who winds up in the bottom half is $100 thousand. But the situation is worse since by making a hiring mistake you didn’t hire someone who could have been in the top half. So for each hiring mistake you need to multiple the direct cost by two to measure the full financial magnitude of the mistake – $200 thousand.
As an FYI, these figures assume the bottom half is on average 25% less productive than the top half, so the actual cost is probably worse. (Contact us for the statistics and other assumptions.)
Using Performance-based Hiring These Costly Hiring Mistakes Are Avoidable
- The biggest mistakes are hiring people who wind up in the bottom 25%. These are people who are either marginally competent or unmotivated to do the work required or jerks. Ask this question to stop hiring these people.
- Those in the 2nd quartile are technically competent but weak on the soft skills or not fully motivated to do the work required on a consistent basis. Here’s how to determine motivation.
- Those in the 3rd quartile are great hires. These people are both fully competent and also fully motivated to do the work required. But to hire these people you need to first find them AND then recruit them.
- Those in the top 25% are superb hires. These people are the ones that exceed expectations and go the extra mile consistently and reliably. You’ll need to convert your ATS into a Performance-based Hiring business process to hire these people at scale.
Consider this oddity. In business, we have a clear discrepancy in the application of standardized processes across different functions. Operations such as logistics, supply chain management, and expense reporting are tightly regulated, with detailed procedures to track every package or scrutinize every dollar spent. These systems are put in place to maximize efficiency and accountability. However, this level of rigor often doesn’t extend to hiring practices. Despite its critical importance to organizational success, hiring often lacks the same formal rules, leaving managers with too much discretion. This can result in hiring decisions that deviate from established criteria and are influenced by personal biases. The contrast is stark: we manage our goods and finances with strict controls, but when it comes to recruiting the people who will handle those very goods and finances, the rules are surprisingly flexible. And each time we get it wrong, it costs the company at least $200 thousand.
That doesn’t make sense to me.