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The Cost of a Bad Hire

Trying to identify recruiting costs is like trying to nail Jell-O to a wall – more nails lead to more nails, and still it’s impossible to accomplish.  There are obvious tangible costs involved:  Place an ad, screen resumes, develop a short list, interview applicants, screen-out unqualified people, check references, and make an offer to the survivor...and repeat as often as necessary.   But these are only the identifiable costs.  What about what happens AFTER the miss-fit is on the job? 


Studies show that about half of new hires turn out to be low performers. In fact, most studies show typical recruiting practices have about the same accuracy as flipping a coin. Anyone with doubts should take the time to follow up with a line manager. Ask if he or she sees performance differences among people the recruiter recommended. If the answer is "yes," the recruiter needs to start thinking about why he or she did not see these differences before hiring.


The Halo


I’ve mentioned this before in the context of physical attributes.  Often a candidate with more appealing physical attributes can lead the untrained to project fantastic skills on this person.  But even seasoned recruiters believe that "getting to know" an applicant provides valid information about a person's "hard" skills. Making quick assumptions based on personal impressions is a weakness of the human condition.

Psychologists call this weakness the "halo" effect. It occurs when a recruiter or hiring manager is so impressed by an applicant that he or she makes unfounded assumptions about other job skills.   They have formed an opinion based on emotional opinions and it is nearly impossible to override.   Eighty percent of our decisions are based on emotional responses, particularly in the absence of any fact based metrics.  This is an easy leap for a manager who has been hired specifically for their own business savvy and judgment.


The Reality


If you have an enterprise that can not recognize a difference between your Rock Star performers and members of the back- up band then you have no problem.  In fact your operation may be about the actual tools and NOT the people using them.  Automotive production lines are an example of tools taking virtually ALL the employee performance based value out of an operation.  Robots now substitute for individual craftsmanship.   This means hiring CAN be a function of who has the nicest haircut.  But most professional positions require more than a $100 stylist.


The Statistics of Performance Cost


We need to review a bit about basic statistics to get a grip on how performance will impact the overall cost of hiring a dud.  There are a few basics surrounding employee productivity differences:


The “Bell” curve above shows a normal distribution for many typical human characteristics.  Once the Mean (average) is established then the entire population is spread out across +/- 3 standard deviations based on the above curve.  Bigger standard deviations indicate bigger differences between people, and a flatter bell shape. Smaller standard deviations means differences are smaller and a more pointed curve.  Human intelligence would apply on this curve, as well as productivity.  Ideally you would want a very pointed curve high on the productivity scale.


The performance curve can be divided into roughly four groups. People in the top 16% ( above mean + 1SD) who produce the most (superior), people between 84% and 51% who produce more than average, people between 50% and 17% who produce less than average, and people in the bottom 16% (fish bait).  Most organizations can see differences in productivity in almost all jobs. Productivity is easy to measure when the work product is tangible (such as in sales or production), but when the work product is intangible (such as in management, professional, or staff jobs), measuring productivity gets more challenging. Regardless of the work product, though, the ability to see and measure productivity is critical to the next step.


Key Indicators


The key in hiring is to identify indicators that are indicative of performance.  We then can focus on progressively decreasing individual differences in productivity by using better methods to ensure only uniformly high-producing employees are hired. That means taking positive action to decrease the standard deviation and stabilizing it somewhere above the average.  This means the company must identify these metrics and clearly identify how to measure them.  This is the hard part because the direct link between a metric and the tool to measure it is always questionable.  It’s not as easy as “I’m looking for an artist, draw a picture.”


Here’s some conjecture based on various studies.  Each standard deviation, the difference in performance between individuals, has a dollar value.   In a lower-level job, the standard deviation for a superior worker is estimated to be 19% more than an average worker, in a skilled job the figure is estimated at 32%, and in a superior Rock Star Manager it's estimated to be about 48%. Converting this to dollars, the following table shows the productivity loss of a small company with 100 skilled and semi-skilled workers, 50 skilled workers, and 25 managers.  The math is simple multiplication across and addition down:


Estimated Average Compensation

Standard Deviation

Number of Jobholders

Over One Year

Over Five Years


























The Bottom Line


So are these figures “accurate”?  Does it matter?  The point is that we KNOW there are differences in individuals and their work performance.  This difference can make a huge difference in the bottom line.  And we have not even mentioned the non-monetary cost of bad hires to morale and customer satisfaction.  Faced with these facts the savvy manager needs to formulate a hiring process based on quantifiable results, not rely on their instincts to pick the person with the best haircut.   If you want your organization to run at peak performance levels, you need to scientifically examine your top performers and determine what characteristics differentiate them from average.   With specific criteria in hand you and your recruiters have a better chance to identify candidates with similar characteristics..  You then can push your companies’ average performance up and minimize the “Bad Hire” cost


Please call or email me if you would like to discuss how the proper tools can help you change your odds of making the correct hire.

Mike Stallfus

310 Ruby Forest Parkway

Suwanee GA. 30024

(404) 806 1497





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