Selecting the right people for your company – how much of a gamble are you willing to take?
Casino-style odds are not good for business
In 2004, on the finale of the reality show, The Rebel Billionaire, Richard Branson offered the winning entrepreneur, Shaun Nelson, the option to leave with his cheque for the one million dollar prize, or to risk it all on a double-or-nothing coin-toss.
Nelson declined the offer, opting to take the guaranteed prize money – which he needed to build his new venture (now valued at $56 million). Branson, a prolific risk-taker and serial-entrepreneur, writes in his book, Screw It, Let’s Do It, that he respected Nelson for not taking the gamble, and that he would have been disappointed in Nelson had he chosen that path. What this shows us is that, when it comes to decisions that are critical to success, casino-style odds do not even satisfy a parachuting and hot-air ballooning daredevil like Branson. Any respectable manager or investor will know that, while risk is inherent in achieving a return, good business involves controlling for risk-factors, using the best information available, and optimising conditions for success.
Hiring the right people shouldn’t be a risky decision
It is for this reason that it is concerning that many companies seem not to be taking due care when making decisions on a critical success factor in their business.
Hiring the right people in the right positions is critical! After all, your people are the ones delivering your products and services. Payroll will also be the largest single expense item on the income statement for most companies. It can be 15 – 30% of gross revenue for most companies and 50% or more for some service businesses. This varies widely per business or industry, but no business leader will be unaware of the significance of these costs – especially in the current times.
Don’t win the short-term cost battle, but lose the long-term success war
Selecting a new employee is a long-term decision. Statistics on the tenure of employees indicates that people will stay with a company between 3-5 years (varies according to a wide range of factors). This average seems remarkably consistent across sectors and countries in the developed world (including South Africa). Furthermore, research has shown that at least 20% of annual salary seems to be a fair rule-of-thumb when considering total replacement cost of an employee. Some estimates place this cost as high as 6 to 9 months of the employee’s salary, especially in higher positions, with other estimates even being significantly higher.
The replacement cost of an employee is estimated by accounting for various factors, including recruitment or advertising fees, training, an initial period of non-optimal performance, and management time spent on the process. This means that replacing a fairly junior manager can cost a company more than R50 000. Having the wrong person in a role can also cost you while they are there.
A study recently cited by Forbes estimates that a disengaged employee can cost a company 34% of their annual salary – taking into account higher absenteeism, lower productivity, and lower profitability. Using the above, the cost of a poor hiring decision – for example, a R20 000 per month manager who underperforms for a year or two before resigning or being dismissed, can waste a company well over R100 000 (including the costs of underperformance at 34 percent and replacement costs at 20 percent of annual salary). Also consider the hassle and frustration for your management team caused by dealing with this poor performance and subsequent replacement.
It is always worth it to make use of products and services that enable you to appoint the right person, in the right job.
It’s not worth the risk to ignore a scientifically valid approach to selecting the right employees. Certainly, setting clear KPA’s, providing training and development, and creating a performance culture may to some extent mitigate the blow of a poor hire, but selecting someone who is not only highly skilled, but who fits with the requirements of the role and the culture of the company is the right way to start and eventually achieve compound results.
There is a better way to achieve a high level of certainty on appointments.
Achieving the right selection decision is, however, unlikely, given the incorrect methods. CV-screening, followed by a typical semi-structured interview, unfortunately leaves you with a decision that arguably does not represent the level of certainty that should be required. Much research has been done into the predictive validity of various selection methods. This refers to how much a candidate’s performance on any selection method (for example an interview) can tell you about how well they will eventually perform in the job.
This can, in turn, be converted into a likely success-ratio for the method of your choosing – in other words, how many of the candidates who perform exceptionally well in the interview, will eventually perform well in the job. Unfortunately, the most common process for selecting employees (the semi-structured interview) will result in a success-ratio of between 11 and 13 out of every 20 employees selected. This might not amount to the same coin-flip decision-making that Branson’s reality show contestant declined, however, on the lower end of the scale it is dangerously close, and one might rightfully ask – is this anywhere near good enough, considering the importance of the decision? A well-selected ability test or simulation assessment alone can increase this “hit-rate” to 15 or 16 out of 20 hires.
When you’re taking a gamble on people placement – the odds are stacked against you.
Camino Consulting specialises in providing clients with scientific solutions to maximise the effectiveness of their selection process, minimising the risks described above. Camino Consulting can support you in avoiding unnecessary risk when appointing new staff, and can even help increase the effectiveness of your current workforce.
Our next communique will provide a picture of why it is important to go about the process of assessment for selection correctly, and how we go about doing it.