September 4, 2013

Below is a letter from AESC president Peter Felix regarding the true cost of making a bad hire and its impact on an organization:

As we seek to emphasize the added value of retained search to clients and persuade them that search is the right way to go, mentioning both risk management and the potential costs of a bad executive hire can strengthen our case.

Raising each of these factors will have strong emotional impact and immediately give pause for thought, and are supported by objective third party research. The US Labor Department and the Society for Human Resources Management (SHRM) estimate that the cost of replacement could be up to five times a bad hire’s annual salary, and inevitably these costs increase at higher executive levels. A CEO bad hire can cost an organization in the millions.

Why? Just think about the elements of compensation and other costs involved. Salary, bonus, severance, benefits - all can add up to staggering sums if the senior executive in question is being terminated because of poor performance or considerations of organizational fit or culture.

Quantifying the real cost of a bad hire, of course, goes far beyond those factors. The impact on morale, performance, productivity, opportunity costs, corporate culture and image can all be severe, let alone the disruptive effect on good employees who may have to work harder to make up for what a bad hire isn’t doing well. Managers who fail, or are negative influencers, harm not just themselves but those reporting to and alongside them. A bad apple easily rots the barrel.

For executive search consultants these concepts of risk and cost are powerful. "Penny wise but pound foolish" is a good motto that serves to highlight that cutting corners can be very short sighted when the appointment in question can have such organizational impact.

Better to take the more cautious and professional route of having a search consultant conduct a thorough market search, due diligence on all candidates presented and a helping hand in decision making. When comparing search fees against the cost of a bad hire the purchasing department should be using different math.

No executive search is perfect but there is a long-established and proven process with retained search that helps to control dangers inherent in recruitment and manage the latent risks that can loom very large if process is mishandled. "Let the professionals handle it for you" is not a bad starting point in discussions with clients.

Peter Felix, President, AESC,