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The Real Cost of a Selection Error

Feb 27 2014

Selection errors cost four to five times annual salary. Hire the wrong person for a $30,000-a-year job and it eventually will cost you about $150,000. The tangible costs alone of a poor hire are often quoted as a minimum of 25-35% of a year’s base salary. The costs go beyond direct salary and benefits. The costs can include materials, recruiting expenses (fees, travel expenses, management time, and advertising), training time and training materials. Other less obvious costs could be losses such as spoilage of materials, products or other resources, lawsuits and even the loss of a customer. All of these costs are quantifiable, and you probably can think of more. And not the least of costs is the time and effort to repeat your recruiting and selection process and training.

 

Intangible costs of a poor hire are five times the tangible costs

Intangible costs are not as easy to quantify. Here are a few that other company owners have shared with me:

  •             Loss of company reputation
  •             Loss of potential clients and referrals
  •             Loss of employee morale
  •             Loss of team productivity
  •             Loss of credibility with other team members

One poor hire can also cause the turnover of productive team members. Remember, people join a company, but they tend to leave a poor leader or manager. When I facilitate a discussion of average turnover costs with company owners, we never reach a total cost of less than $8,000 in tangibles and $40,000 in intangibles.

 

Selecting the wrong manager is worse

Worse than poor hiring decisions are poor management selection decisions. Select a poor manager and your turnover costs are the number of people managed times the average cost per turnover.

Time and time again, I have witnessed the loss of an office or that entire profit center because there is a poor manager or leader in place. In the case above, if the team has eight members and we assume that they produce a million dollars of revenue, then losing this unit is a million dollar loss! This is only the “opportunity cost” for each year.

The question I often ask CEOs and business owners is: How much do you budget for staff turnover? They always answer, “We don’t.” My follow up question is, “Where does this loss appear?” The answer is: “From bottom line profit.”

 

My own real life success story

Do you wonder how the selection process you’re about to discover works in real life? Wonder no more. Before I learned and implemented the selection process outlined here, I ran a sales office with 32 part-time and full-time employees. By using this process, I doubled my sales with a much leaner staff of just 12. A commitment to hiring only high quality team players who were the right fit and could produce made a huge difference in the success of my business

Great talent isn’t retained without this

When I conduct organizational studies, part of my process is for all managers to write their perception of their job by listing their key activities. Having read hundreds of these responses, I’m sad to report that there’s no reference to staffing their team and no reference to recruiting as an activity. Great talent is not going to be retained if management does not recognize recruiting and selecting great talent as a key leadership activity.

The bottom line is that when you select great talent, your organization will grow and prosper. When you do not, you end up with morale issues, lower production, slower growth and lower profits long term. Selecting great talent also gives you more options at the time of succession due to the depth of talent within your organization.

The right person in the right position will be a great asset. The right person in the wrong position will be a detriment to the organization’s success. The right person in the right position is easily trained, develops naturally and will accomplish the job objectives.

 To receive an overview of a selection process that works please email bclinton@business-wise.com request “Selection Overview”.

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