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HR Landscape Article Series: The Real Cost Of Hiring The Wrong Candidate

“Hiring the wrong executives or employees for any of the wrong reasons is a formula for disaster,” writes Howard Kesten of APA Search.

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For 28 years, Howard Kesten has been the Owner/President of APA Search, an executive search firm specializing in the automotive industry. Between 1988 to 2016, APA Search interviewed more than 50,000 automotive industry executives and placed more than 2,500 of them in companies ranging in size from $2 million to $60 billion. Howard provides counseling to his corporate clients in organizational development. He also provides coaching to executives to help accelerate their careers. Prior to APA Search, he spent several years with Dana Corp., and earlier owned and operated a chain of automotive two-step warehouses in and around New York City. He is also a noted industry guest speaker and a board member of numerous aftermarket companies.

About 25 years ago I was fortunate enough to be invited to conduct a few executive searches for two well-known and highly respected aftermarket industry executives; Steven Berman and his brother, the late Richard Berman. Steven and Richard were the founders of R&B Automotive, which is Dorman Products today. The meeting was inspiring and uncharacteristic of what I typically experienced when I met with a new client.

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Whereas many of the clients we worked with at that time had used candidate compensation information as their initial screening tool, Richard and Steven did not concern themselves with compensation and only wanted to meet the most qualified people, regardless of the cost. They believed that great people made great companies and that they would always find the money to hire the best people. Of course, as we all know, Dorman went on to grow exponentially and they continue to set the bar for many other aftermarket companies.

We were very influenced by Richard and Steven. To the degree that we can, we continue to urge our clients to hire the absolutely best people whenever possible. In those instances where a company has taken a hard stand on compensation, or they want to short cut the search process, we typically decline the work.

All that being said, whether you do the search yourself or you outsource it, hiring the wrong executives or employees for any of the wrong reasons is a formula for disaster. Some of the wrong reasons might include:

  • Feeling that you need to promote from within, even when there is no one qualified
  • Only hiring people that fit into your pay scale
  • Hiring people with great potential but don’t have the ability and experience to do the job when you first hire them
  • Hiring people who are the most available versus the most qualified
  • Hiring only local people because you don’t want to invest in relocating better people
  • Hiring people that answered your ad because you just don’t have other people to choose from
  • Hiring people with the relevant experience, but who have demonstrated mediocre performance

Breaching the search process and hiring the wrong people can be much more expensive than hiring the right people with possibly higher compensation needs. Let me give you an actual example of what it recently cost one of our new clients who made a poor hiring decision last year.

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The client, on their own, hired a VP of sales from a competitor at a starting base salary of $175,000 with a guaranteed first year’s bonus of $50,000. Because the individual worked for the company’s largest competitor, they believed, and the candidate represented, that he would bring significant business with him.

The candidate was not introduced to the team during the interview process in order to maintain the candidate’s confidentiality. References were not checked thoroughly because the candidate would not provide references at the candidate’s current employer or his existing customers.

Shortly after beginning with the new company, the CEO realized that there were enormous cultural differences between the two companies. The VPs autocratic management style was alienating his new team, which now began to avoid any interaction with him. As a result the sales team remained somewhat unmanaged.

It took the new VP 120 days to become familiar with the company, products, pricing and personnel and very little was accomplished during that time.

The candidate had not done his homework before accepting the position and later realized that his new employer was selling a higher quality product at a higher price and that it would be difficult to maintain adequate margins selling at the prices he was accustomed to. He pushed the company to allow him to sell at a reduced margin for a “promised” dramatic increase in volume. The volume increase never materialized.

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Last but not least, the candidate negotiated a one-year’s severance on termination if it occurred within the first two years of employment.

The company’s sales were roughly $75 million prior to the hire. Company sales dropped by 3 percent during the year that he was there. With a 25 percent GPM, that equated to a company profit decline of $562,500.

The company had been growing at 2 percent per year prior to hiring the candidate. $1.5 million at 25 percent GP = $375,000 profit decline.

The company had to pay the new hire severance of $175,000. The company had to pay the $50,000 guaranteed bonus.

The company had to absorb the expense of integrating the new hire at a cost of approximately $50,000.

Eliminating the actual salary for the position, which would have been paid to someone anyway, the company realized an overall loss of $1,212,500.00. This number doesn’t include the expense relative to refilling the position and getting the company back on track with both their customers and employees. It also doesn’t include the loss of opportunity that they would have realized had they hired the right individual the first time.

It’s wise to take the time to conduct a proper search for the absolutely best people, and then pay them what is fair and what they need. Your business will flourish.

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Please don’t hesitate to contact us with any questions.

Editor’s Note: Have questions about job searches, interviews or finding (and keeping) great employees? Send them our way and Howard may answer them in an upcoming feature! Send your questions to AMN Editor Amy Antenora at [email protected].

For nearly three decades, APA Search has helped numerous aftermarket companies find great talent. The firm has worked with clients to help fine-tune their organizational structure as well as develop successful succession strategies. In the coming weeks, Howard Kesten and APA Search will continue share with AMN readers practices that will help keep your company staffed with the most qualified executives, rather than the most available. If you’re a career-seeker, we’ll provide you with the secret sauce for effective and successful interviewing. Stay tuned!

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