The High Cost of Poor Hiring - dummies

By David E. Perry, Mark J. Haluska

Hiring the wrong executive will cost you, it really will cost you! For example, in the six months after Marissa Mayer took over as CEO of Yahoo!, the company’s market value increased $17 billion. Around the same time, JCPenney, guided by new CEO Ron Johnson, saw sales decline by $4.3 billion.

Regardless of what comes next for either Mayer or Johnson, there’s never been a clearer example of getting an executive hire right versus getting it wrong.

Looking at the costs: On the low side, you’re looking at the executive’s compensation — say, a few hundred thousand dollars. On the high side, that number is, well, higher. Dr. Brad Smart, author of Top Grading (How to Hire, Coach, and Keep A Players), has been quoted as saying, “It is painful and costly to hire the wrong person. Based on our studies the average cost of a mis-hire can be six times base salary for a sales rep, 15 times base salary for a manager, and as much as 27 times base salary for an executive.” In other words, suppose you hire an executive who earns $250,000 per year, and things don’t work out. According to Smart, that could be a $6,750,000 mistake!

It could be even worse than that. Consider this story about NBA star Stephen Curry. In 2009, the Golden State Warriors used their first draft pick to select Curry, a scrappy point guard out of Davidson College. Over the next few years, Curry would energize an organization that hadn’t won a championship since 1975. In 2013, Curry, who had long been a member of Nike’s stable of athletes, was due to re-sign with that company. Things quickly went off the rails, however. According to Ethan Sherwood Strauss of ESPN:

The pitch meeting, according to Steph’s father Dell, who was present, kicked off with one Nike official accidentally addressing Stephen as “Steph-on,” the moniker, of course, of Steve Urkel’s alter ego in Family Matters. “I heard some people pronounce his name wrong before,” says Dell Curry. “I wasn’t surprised. I was surprised that I didn’t get a correction.” It got worse from there. A PowerPoint slide featured Kevin Durant’s name, presumably left on by accident, presumably residue from repurposed materials. “I stopped paying attention after that,” Dell says. Though Dell resolved to “keep a poker face,” throughout the entirety of the pitch, the decision to leave Nike was in the works.

Maybe that Nike official just had a bad day. But more likely, he was incompetent. If that was in fact the case, it seems fair to assume that Nike’s HR department failed to vet him properly during the hiring process. In other words, he was the wrong hire — and this proved costly indeed. That’s because Curry, instead of signing with Nike, opted for Under Armour — a move that analysts say could result in as much as a $14 billion increase in that company’s value. That’s billion, with a B.

So to sum up: Nike (probably) made a lousy hire. That lousy hire botched the deal with Curry (who, incidentally, led his team to an NBA championship two years later). Curry went elsewhere — and now Nike’s out on a potential $14 billion boost to its bottom line.

If hiring the wrong person is bad, not hiring the right person can be disastrous. Here’s an example. In the summer of 2009, Brian Acton, a former engineering executive at Yahoo!, sought a new position at Facebook. Now, you would think that Facebook, a technology company that’s barely a decade old but is already a global brand with a market cap of $363 billion, would employ recruiters with super-human powers — able to spot high-performing individuals from miles away, that kind of thing. But in this case, Facebook blew it. It rejected Acton.

Shortly thereafter, Acton partnered with another former Yahoo! engineer, Jan Koum, to develop WhatsApp, a messaging application that enables users to exchange messages on their mobile devices without having to pay for SMS. Five years later, Acton and Koum sold WhatsApp for a whopping $22 billion. Guess who bought it? That’s right. Facebook.

Bad hires can even bring down a business. Take Enron, which claimed revenues of nearly $111 billion in 2000 only to declare bankruptcy the very next year and eventually dissolve altogether. You could easily make the case that Enron’s demise was due ultimately to poor hiring. After all, it was people — including senior leaders — who engaged in the fraudulent accounting activities that ultimately brought about not only Enron’s collapse, but the collapse of the company that audited it, Arthur Andersen. Poof! Two corporate giants — once thought of as great places to work — gone.

Less than a decade later, history repeated itself when shady practices, ultimately brought about through poor hiring, destroyed such venerable firms as Lehman Brothers, Bear Sterns, AIG, and Washington Mutual.

The fresh thinking of a skilled leader can have a dramatic impact on your organization’s bottom line. Hire a star, and he’ll unleash innovation, empower employees, and generate wealth for your company. Choose poorly, and as you’ve seen, you could suffer serious financial penalties — or even the destruction of your entire organization.