How to Fund a Decade of Leadership Development by Avoiding Just One Bad Hire

Forbes recently reported that among the world’s top 2,500 publicly held companies, the cost to shareholder value of an unplanned CEO departure comes in at $1.8 billion more than a planned departure.

That’s a lot of zeroes. Way more zeroes than the average salary of those CEOs.

Most of those unplanned departures result from bad hiring decisions. Based on an average CEO salary of $12 million for Fortune 500 companies, that makes the multiplier on a CEO’s salary greater than 100x if you want to understand just how costly the wrong hiring decision can be for the world’s top companies.

Odds are, your company is not among the world’s top 2,500. Maybe your organization isn’t even publicly held. For you, what is the cost of a poor hiring decision in the highest ranks of your company?

Cost of turnover estimates for leadership roles are hard to pin down. C-suite roles and salaries vary widely, and research on turnover and retention for the C-suite in general is sparse. I’ve suggested before (here) that a multiplier of 10x is probably a conservative estimate on the cost of unwanted leadership turnover for an “average” organization.

Go ahead and do the math on that. Add a zero onto the end of the salary of one of your C-suite leaders. That’s what it will cost you to make a bad hire for that position. Here’s an example:

CFO at Company XYZ
Salary = $275,000
Cost of a hiring mistake = $2,750,000

Remember that’s a conservative estimate. Now, take a deep breath and consider your odds on any given hiring decision. (If you're still wondering, "Really? 10x?" click here for the details)

DDI’s Global Leadership Forecast 2014 | 2015 reports the success rate for external hires into leadership roles at an uninspiring 50-55 percent. Not much better than flipping a coin.

That same study shows that the success rate for internal hires is much better at 70-80%.

Let’s do the math to look at ballpark fail rates:

External hire fail rate = 50% 
Internal hire fail rate = 25% 

Making that selection decision by hiring from within cuts your odds of making a very expensive mistake in half. That’s a great argument for investing in leadership development and promoting from within your organization.

Go back and look at your math. What did you calculate as the cost of a failed leadership hire? In our example, the conservative cost estimate of that hiring mistake was $2,750,000.

What would happen if your organization invested just 10 percent of that cost into the people you already have by identifying and developing high-potential candidates for future leadership roles?

You could make that kind of investment every year for 10 years (and fill several key leadership roles with internal talent as a result) before your investment would equal your potential loss for just ONE bad hire at a salary of $275,000.

And for every position you filled with internal talent, you would be cutting the odds of another costly mistake by half.

Taking what your organization would spend on just one bad hire and investing it into long-term leadership development and succession planning creates a leadership pipeline that makes hiring mistakes 50 percent less likely and helps you avoid the high price tag of unplanned departures through intentional succession.

Boards and leadership teams need to make internal leadership development and succession planning ongoing priorities that receive constant attention and regular updates. Visit Talent Plus ® to learn more about how we can help your organization can select, retain, develop and promote great leaders.