We often hear great leaders talk about the importance of people at their organizations. Hiring great people is fundamental to an organization’s success. As Lawrence Bossidy, the former COO of General Electric, said, “Nothing we do is more important than hiring and developing people. At the end of the day, you bet on people, not on strategies.”
People are your competitive advantage. They are how you innovate and build a sustainable business. And yet, there is often little to no measurement of the performance of a hiring operation. At the end of the quarter when you are measuring sales, revenues, and profits, you are likely forgetting the largest indicator of company success: Quality of hire.
Companies who invest in their people have a structured hiring process in place to ensure they acquire the best talent for the job. Doing so results in maximized returns for your organization, because quality of hire has direct ties to your company’s revenues in two fundamental ways:
1. The significant cost of hiring the wrong people
2. The positive impact of hiring the right people (performance differential)
1. The Cost of A Bad Hire
The Center for Economic and Policy Research has released a calculator to help management more accurately estimate the cost of employee turnover at a company. Additionally, Dr. Brad Smart, the founder of the Topgrading hiring method, has determined that the average cost of a mis-hire can be roughly fifteen times an employee’s base salary.
Some costs are more visible – if you hired a headhunter, you know how much money you spent on hires that came from his or her efforts. If you have an in-house talent acquisition team, you should know how much money you spend on job advertisements. Yet this data does not provide a full picture of what is truly lost as a result of a bad hire. How much time did each of your employees spend recruiting, interviewing, and training this person? What impact did he or she have on company productivity?
This FastCompany infographic demonstrates several indirect ways a mis-hire is detrimental to company success, including negative impact on client solutions, employee morale, and productivity. And often, you aren’t aware that you have made a bad hire until it’s way too late, resulting in a number of missed opportunities, lost revenue, and even more bad hires.
Tony Hsieh, the CEO of Zappos, admits in an interview that hiring is the biggest category of mistakes at the company. “If you add up the costs of all the bad decisions the bad hires make… and on top of those, the bad hires that made other bad hires, over the course of Zappos’ history, it’s probably cost us well over $100 million dollars.
In an article on “How to Reduce Employee Turnover,” The Wall Street Journal advises management to reconsider their hiring methods to acquire the best people from the start. They say, “Interview and vet candidates carefully, not just to ensure they have the right skills but also that they fit well with the company culture, managers and co-workers.” The advice may seem obvious — but still, FastCompany reports that 38% of companies polled say that they mishired because they rushed to fill a position.
2. Great Hires Deliver Exponential Value (And Returns)
It’s no surprise that the best way to avoid bad hires is to get better at hiring the best talent for your organization. Tony Hsieh recovered his losses at Zappos by changing its hiring principles; instead of hiring as fast a possible to fill roles quickly, Zappos hires slowly. Taking the time to implement a process has helped Zappos identify top performers that are the right fit for their organization.
Beyond avoiding the cost of a mis-hire, hiring top talent has measurable impact on your company’s revenues because of a significant performance differential. For example, Google has found that hiring a top-performing employee will result in 300 times more productivity and business impact than an "average" employee. And because the "average" Google employee generates $1 million in annual revenue, a single hire can make the company up to $300 million in a year!
GE, Microsoft, Yahoo and Apple have all also estimated significant performance differential (“double-digit”) at their organizations. And it’s no coincidence that these companies are well-known for both their top-tier talent and their hiring cultures.
Your applicant tracking system should help you understand your quality of hire, as well as identify the sources from which they came. Learn more about 10 things your ATS should be doing to help improve your hiring process.