Dialing for Dollars: Calculating the Costs of Hiring Decisions

After I became a graduate student for the second time, I learned that Maslow’s “hierarchy of needs” was thoroughly unproven as a management motivator. When I was a trainer, I consistently praised the benefits of the “Hawthorne Effect” (i.e., production increases when management pays attention to workers). Then I learned the training materials always stopped short of adding the rest of the Hawthorne story: “after a short time, production returned to pre-observation rates.” (There are many more examples of misinformation, but I have limited space). Mediocre performance is another one of those bogus misconceptions. People seem to take it for granted that interviews and unvalidated tests predict high job performance. They preserve this myth by:

  1. poorly, if ever, following up on hiring predictions
  2. remembering successes and forgetting failures
  3. ignoring 50 years of research showing better ways to hire
  4. being ignorant of DOL “Uniform Guidelines” best practices (and proud of it!)
  5. confusing “cultural diversity” with “skills diversity”
  6. not wanting to work very hard
  7. (the worst of all) believing mediocrity is normal

Dialing for Dollars One way I get people to pay attention to the benefits of good hiring is to get them focused on calculating both cost and the return on investment. And nothing works better than a sales example. First, think of hiring as having an “effectiveness dial.” This dial starts at “zero” (i.e., hire everyone and see who survives) and goes to “max” (hire only applicants who pass the most rigorous tryouts). Most recruiters seem to think a “50%” setting is nice. They can ask questions, get to know the applicant, eliminate folks who give unsatisfactory answers, ask sales candidates to “sell the pencil,” and bet the organization’s money on the remainder. A 50% setting delivers a 50% result: about half the salespeople become high producers. 50% Dial Setting We’ll do some basic sales math to see what a 50% dial setting really costs. Here are 10 salespeople and their sales numbers. Like most sales groups, a few salespeople deliver most of the sales. The rest just manage to get by. For the purposes of this example, we’ll assume all salespeople all are at least “grudgingly” satisfactory. The percentages are rounded.

Molly $5,000,000 (33%)
Fred $4,000,000 (26%)
Sarah $2,000,000 (13%)
Ted $1,000,000 (7%)
Mary $700,000 (5%)
——- Halfway ——–
Frank $700,000 (5%)
Linda $500,000 (3%)
Chris $500,000 (3%)
Marsha $300,000 (2%)
Saddam $200,000 (1%)

People above 50% produce an average $2,540,000 per salesperson. People below 50% produce an average $480,000 per salesperson. This difference costs the organization $10.3 million in lost sales ($2,540,000 – $480,000 = $2,060,000; $2,060,000 x 5 = $10.3 million) every year. 60% Dial Setting Now let’s set the dial up to 60%. A 60% setting means we’ll probably delete the bottom 20% in the pre-hire phase (i.e., 60-50 = 10 and 10/50 = 20%). Here we go again with our numbers:

Molly $5,000,000
Fred $4,000,000
Sarah $2,000,000
Ted $1,000,000
Mary $700,000
—– Halfway ——
Frank $700,000
Linda $500,000
Chris $500,000
Nancy $500,000
Clyde $500,000

Now the average sales for the bottom half is $540,000. A tweak of the dial has added another $300,000 to the bottom line ($2,540,000 – $540,000 = $2,000,000; $2,000,000 x 5 = $10,000,000; and $10,300,000 – $10,000,000 = $300,000). 80% Dial Setting Now let’s set the dial to 80%. An 80% setting means we’ll probably delete the bottom 60% in the pre-hire phase (i.e., 80% – 50% = 30% and 30% / 50% = 60%). And the numbers, please!

Article Continues Below
Molly $5,000,000
Fred $4,000,000
Sarah $2,000,000
Ted $1,000,000
Mary $700,000
—– Halfway ——
Bill $700,000
Wanda $700,000
Harry $700,000
Beth $700,000
Newt $700,000

Now the average sales for the bottom half is $700,000, and the annual added bottom line contribution is $1,020,000 ($2,540,000 – $700,000 = $1,840,000; $1,840,000 x 5 = $9,280,000; and $10,300,000 – $9,280,000 = $1,020,000). These figures are a basic example of how profitable better sales screening can become (clients actually report much higher results). Use your own sales numbers and go through the same drill to see what sales hiring mistakes really cost. The premise in both situations is the same: you can screen out weak salespeople in pre-hire or screen them out on the job. Danger! Danger! Nothing is perfect. Usually the best that can be accomplished is a 90% dial rate. Why? Too many things interfere with selling. So what can you do?

  • Sales managers need to change their, “I know ’em when I see ’em” attitude to a “I know ’em when I see their sales skills” attitude.
  • Recruiters need to pre-screen applicants for their: 1) ability to learn and solve sales problems, 2) willingness to sell, 3) ability to discover information and present ideas persuasively, and 4) ability to plan and organize sales activities.
  • Hiring managers and recruiters need admit if effective pre-screening was so easy to do, why wasn’t it done before? Testing methodology cannot be learned by reading short articles like this. It takes professional skills and experience. If testing seems too easy, it probably won’t work.
  • Calculate how much it costs to hire and train low producing salespeople. Then ask yourself why they weren’t identified by an interview.

Do the numbers. The difference between a 50% accuracy rate and a 90% accuracy rate is an 80% improvement! (90% – 50% = 40%, and 40% / 50% = 80%). Could your organization use an 80% improvement in sales?

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6 Comments on “Dialing for Dollars: Calculating the Costs of Hiring Decisions

  1. Martin makes a good point. But I suggest:

    1) The Nets and Marlins players are all highly skilled athletes who passed extensive and exhausting tryouts to get their jobs. They were only selected based on gut reaction after they demonstrated game skills.

    2) Even a good player can be screwed up by a poor coach. Coach-quality is a selection decision.

    3) The difference between Meade and Grant’s victories illustrate the effect of good leadership when all else remains constant. So too is the whomping the Northern Armies took at the hands of a smaller, poorer outfitted, yet better-led Southern army.

    4) I agree that an unlimited number of outside factors can affect performance, but I’ll bet anyone that a group of people, carefully selected for their jobs, will repeatedly trounce any other group.

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  2. Martin-

    Your last paragraph is most telling:

    ‘Skilled recruiters and managers are PAID to understand, and lead, human beings to grow and achieve beyond expectations. Some of that is based on the raw material, but a great deal of it happens AFTER the pick is made.’

    Recruiting is one issue, leadership another. Right now, the real question is ‘How do skilled recruiters become skilled recruiters?’

    If great recruiters were to undergo intensive introspection, they’d discover that their success was not a result of chance or intuition. Over years and with mentoring, content knowledge and experience turn into advanced heuristics that are employed during searches. But once these shortcuts have been developed, it’s really difficult for experts to see the path they took along the journey.

    Wendell et. al. are selling the journey when most others only want to see the destination. Unfortunately, the road to recruiting excellence doesn’t work this way.

    There’s a paradigm shift coming in recruiting and it’s not based on technology: It is an holistic approach that combines staffing and OD where success is measured against business based criterion.

    It wouldn’t hurt to listen and take a refresher course on measurement.

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  3. It?s hard NOT to agree with Dr. Williams on many of his points. Most selection procedures are flawed, as practiced today. Following the DOL Uniform Guidelines for Employee Selection is a fantastic way to find better selection performance and engender a much greater legal defensibility.

    One might quibble when he advises against believing ?mediocrity is normal? when mediocrity is a synonym for normal, but I can get past the fact that we all want to score above average!

    While reasonable people should have respect for scientifically validated selection procedures, I continue to find the example methodology used here to be without much value.

    Selection is NOT the only determinant of outcome, and in certain roles, it?s not even a prime determinate, and ?sales? in a broad sense, is one of those roles.

    For example, I give you the 2004 New Jersey Nets. Under coach ?A? they can?t win a ballgame. Under coach ?B?, they can?t lose a ballgame. Same five guys on the court. The 2003 Dallas Cowboys- same thing. I might add the Army of the Potomac under Meade and then Grant as well, but we all know examples of this effect from everyday life.

    All the selection procedures in the world have nothing to do with those changes in outcome.

    And sure it might be temporary, but then again, when performance eventually comes back down, in the long run, it may be cheaper and easier to change coaches again….and we all know what John Maynard Keynes said about the long run.

    I personally have seen people blossom into incredible salespeople – total MVP?s, who had no sales skills to speak of. How does it happen? That?s the subject of another discipline.

    One thing that seems ineffective is to make a chart of imaginary sales to show how better picks would add up to more money. Sure it might, but then again, one of the people could have bad karma and wreck the rest of the team in no time- and that person could have performed immaculately on every selection procedure.

    So my review of this short article is one that I expound all the time; select carefully, use the Uniform Guidelines, use validated scientific procedures for SUITABLE roles in REASONABLE proportion, but NEVER make hiring decisions based on what a computer program of piece of paper says.

    Skilled recruiters and managers are PAID to understand, and lead, human beings to grow and achieve beyond expectations. Some of that is based on the raw material, but a great deal of it happens AFTER the pick is made.

    With Best,

    Martin

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  4. Thank you Dr. William’s for another interesting and insightful article but then again, I agree with you. For those who want a real life example I offer the following results from an actual six month assessment program designed to lower employee turnover and boost sales in one of six US divisions of a 15,000+ employee company.

    Before the six month program the division had
    – an annual employee turnover rate of 34%.
    – sales people who averaged 101% of sales quota.

    After the six month program the division had
    – lowered employee turnover to 19%.
    – new salespeople, who had a Benchmark Suitability
    of 84% or below, average 187% of sales quota.
    – new salespeople, who had a Benchmark Suitability
    of 85% or above, average 916% of sales quota.

    Yes, the program was implemented in the other five US divisions. Employers like to decrease turnover and boost sales. In other words, assessments can help some employers drastically improve their employee selection process.

    By the way, users of the Bliss-Gately Tool report the cost of replacing a $50,000 per year employee at about $75,000 (150% of annual salary). The cost of a bad hire is high indeed.

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  5. Eamonn Coleman asked me ‘Are you sure those figures are correct, that the sales force was AVERAGING a 1000% of quota??’

    I’m pretty sure I wrote that the division sales people averaged 101% of sales qouta and that new sales people who had an 85% or higher job suitability averaged 916% (almost 1,000%) of sales quota and the rest 187% (almost 200%)of sales quota.

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