Counter-Intuitive Approach to Cost-Per-Hire

Reading Time: 10 minutes – Focusing on ‘outcome’ versus ‘cost-per-hire.’

Technology-driven talent suppliers such as LinkedIn and related job-board aggregators stress ‘cost per hire’ and ‘speed to hire’ as two fundamental features of their value proposition. Their value proposition caters to the hiring organisations who measure the success of their talent acquisition through its ability to reduce the cost of hire and refill a vacancy in the shortest time possible. Their algorithm lacks the ability to predict job performance outcomes.

It’s not surprising these metrics receive such importance. From a corporate perspective, the cost of not filling a critical vacancy with a quality hire rapidly will directly impact the bottom-line. As departmental metrics, they commonly factor into the in-house recruiter’s job performance assessment.

“A lousy hire compounds the original cost of acquisition.”

Reducing recruitment costs is a distinct corporate goal but hiring well and ‘time on the job’ are not always mutually compatible outcomes. Incompatibility of outcome may seem cynical, but it’s not without some justification, as the soft and hard costs of terminating a lousy hire compound the original cost of acquisition. Perhaps the cynicism is well placed given the statistic that 40% of all senior hires fail within 18 months.

“Forty percent of all senior hires fail”

Perhaps rather than thinking in terms of cost per hire, maybe one should be more counter-intuitive and consider the value of the outcome. It is possible to hire for results where the probability of productivity and profitability relative to per employee average is 55% and 25% respectively. Amortizing the cost of hire using these metrics would be more palatable to the bottom line as opposed to the current approach.

“A CEO’s average tenure is four years”

Regardless of performance, studies have determined that a CEO’s average tenure is four years. Consider the financial outcome of hiring a below average CEO over a four-year term. The cost of acquisition is a pittance in comparison to the long-term outcome of the corporation’s growth. Understandably, many reasons may account for the four-year average, but let’s assume their departure is related to poor performance.

“Can take time for a Board to recognize hiring error”

During the first six quarters, the CEO receives the benefit of the doubt from the Board, followed by two-quarters of growing concern with the likelihood of one or two key executives leaving without fanfare. The Board assumes their departure is related to being overlooked for the top role, all quite understandable; besides the new CEO must be able to cull and pick their team.

“Average executives hire average subordinates”

Early year three, the two key executives are replaced, but since below average executives tend to hire below average subordinates the downward glide path of the firm is in motion. The company’s struggle is self-evident to rank and file, leading to the departure of critical employees and middle-management. Their loss triggers a lowering of morale, which is generally indicated by a drop in employee engagement, a rise in absenteeism and company targets not being met.

“Departure of critical employees”

Indications of eroding corporate performance are evident at this point, and the reasons lie squarely on the CEO’s shoulders. The Board can’t avoid the obvious any more than they can not admit to having made a hiring error. The Board establishes a search committee along with recognition they will need to pay a “danger premium” to attract the right replacement CEO.

“Foregone opportunity costs & hard dollar erosion”

The cost of talent acquisition is high, as is the king’s ransom in severance paid to the incumbent. However, it pales in comparison to the foregone opportunity costs and hard dollar erosion of corporate wealth during the outgoing CEO’s four-year tenure. One can only hope the equity analysts will look kindly on the new bold hire.

“Functionally, 25% of  the talent pool is ‘Above Average'”

Industrial psychologists will confirm my thesis that in any given function, the industry will consist of the following prospects: 50% Below Average, 25% Average and 25% Above Average. With these percentages, the hiring of two below average candidates back to back puts a whole new light on the real ‘cost of acquisition’.

“Hiring for profit & productivity outcomes”

Hiring for double-digit profit and productivity outcomes is not a complicated process at any level of the organisation when you know how to identify the top 25% of prospects. The challenge is persuading them to leave their companies. This shouldn’t be difficult for a skilled headhunter, particularly if they’ve had a Below Average superior dropped in over their heads. The odds of this having happened are apparent.

For further information, contact me at forbes@rutherfordinternational.com

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