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 hiring organizations that measure the success of their talent acquisition by its ability to reduce the cost of hire and fill a vacancy in the shortest time possible. Their algorithm cannot 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 outcomes may seem cynical, but it’s not without justification, as the soft and hard costs of terminating a lousy hire compound the original acquisition cost. 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, one should be more counterintuitive and consider the value of the outcome. It is possible to hire for results, with probabilities of productivity and profitability relative to the per-employee average of 55% and 25%, respectively. Amortizing the cost of hire using these metrics would be more palatable to the bottom line than 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 compared to the long-term benefits of the corporation’s growth. Understandably, there may be many reasons 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 in year three, the two key executives are replaced, but since below-average executives tend to hire below-average subordinates, the firm’s downward glide path is set in motion. The company’s struggle is self-evident to the rank and file, leading to the departure of critical employees and middle management. Their loss lowers morale, generally indicated by a drop in employee engagement, a rise in absenteeism, and unmet company targets.
“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 avoid admitting they made a hiring error. The Board establishes a search committee and recognizes that it 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 forgone 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 proportions: 50% Below Average, 25% Average, and 25% Above Average. With these percentages, hiring two below-average candidates back-to-back casts 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 organization 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