Good employees will make you money. A poor employee will cost you – a lot. Let’s assume you have the wrong employee and they are being paid $50,000pa. Their manager is being paid $100,000. This employee has to leave.
The possible costs of losing someone like this are shown below.
| Stage |
From |
To |
| Recruitment advertising |
Internet - |
$100 |
Newspaper - |
$3000 |
| Consultant’s fee |
18% |
$9000 |
| Time to plan and interview by Manager |
2 days |
$800 |
8 days |
$3200 |
| Training – time spent by Manager |
2 days |
$800 |
1month |
$8300 |
| Training – non productive time by employee |
2 weeks |
$1900 |
6 months |
$25000 |
| Opportunity cost – value that should be generated by an effective employee over a year |
20% of salary |
$10000 |
300% of salary |
$150000 |
| Non productive time if resigning or being terminated |
1 month |
$4200 |
3 months |
$12500 |
| Total |
$17800 |
$211000 |
| Percentage of salary |
35% |
422% |
The costs of poor performers
Let us look at returns and costs from another perspective. The following is based on research by Frank Schmidt and John Hunter who, in 1998, investigated 85 years of research about hiring tools.[1]
Personal productivity tends to follow a bell shaped curve.
For large data sets (say, more than 30), approximately 68% of the data are contained within one standard deviation of the mean, 95% fall within two standard deviations. 97.7% (or almost 100% ) of the data are contained within three standard deviations (S) from the mean.
As a short cut, the bell curve can be divided into four sections 0-16% the low performers, 17-50% the lower than average, 51-84% the above average and the top 16%.
Research indicates that a standard deviation for a superior worker in a lower level job is 19% higher than an average worker. In a skilled job this is 32% and in a manager/professional job this is up to 48%.
If you didn't follow the statistics above, don't feel bad, a lot of people don't! What they mean, in simple terms is that research has shown that, in an unskilled job, an above average worker will be 19% more productive than an average worker. In a skilled job this difference is 32% and at management level an above average manager is nearly half as productive again as an average manager.
Converting this to dollars in an organisation of 100 people, this may look like the table below.
| Position |
Estimated Average Compensation |
Standard Deviation
(the difference between a superior and average worker) |
Numbers of job holders |
Cost over one year |
Cost over five years |
| Unskilled/semi skilled |
$40,000 |
19% |
60 |
$456,000 |
$2,280,000 |
| Skilled |
$50,000 |
32% |
30 |
$480,000 |
$2,400,000 |
| Manager/Professional |
$70,000 |
48% |
10 |
$336,000 |
$1,680,000 |
| Totals |
$1,272,000 |
$6,360,000 |
So, with our sample of 100 people in an organisation, having superior workers instead of average workers can make quite a difference - over a million dollars a year!
This seems a reasonable case for recruiting good people, trying to keep them and encouraging above average performance.
Keeping these costs down necessitates a number of key actions.
- Keeping the good people you already have
- Having the good people perform
- Recruitment ie getting the right person in the first place when there is an opportunity.
[1] The validity and utility of selection methods in personnel psychology: Practical and theoretical implications of 85 years of research findings, Psychological Bulletin, Sept 1998, Vol. 124, No. 2, pp 262-274.
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