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Mercuri Urval Logo
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Mercuri Urval Logo
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Log in
Worldwide
 * Our Services
   * Leader Selection Science
   * Executive Search
   * Leadership Assessment
   * Professional Recruitment
   * Leadership Advisory
   * Leadership Coaching
   * Expert Practices
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     * Digital & Transformation
   * Industry Practices
     * Automotive & Mobility
     * Consumer
     * Energy
     * Financial Services
     * Professional Services
     * Industrial Products & Manufacturing
     * Life Sciences
     * Property & Construction
     * Public
     * Technology, Media & Telecommunications
     * Transport & Logistics
   * Partnership with Cranfield University
 * Your Career
   * Open Opportunities
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   * Assignment subscription
   * A Career with Mercuri Urval
 * About Us
   * Our Organisation
     * Our Vision
     * Our Values and Code of Conduct
     * Our Inclusion & Diversity Commitment
     * Our Ethics
     * Our History
   * A Year in Review
   * Mercuri Urval and GDPR
   * A Career with Us
     * Becoming Partner
     * Why Mercuri Urval
     * Voices of Mercuri Urval
   * Delta – A MU Company
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   * Contact
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   * Leadership
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 * Research Institute
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LEADERSHIP MATTERS: THE EYE WATERING (AND AVOIDABLE) COST OF FAILED LEADER
APPOINTMENT




By Richard Moore

--------------------------------------------------------------------------------

For as long as business has existed, Boards, executives and academics have been
aware of the importance of effective leaders. Leaders have the largest, most
immediate, and longest-term systemic impact on the people who work for an
organisation and the results they are able to achieve. Through both applied
research and practice, effective leadership has been found to enhance
productivity, fuel economic success, sharpen an organisation’s competitive edge,
attract, and engage relevant talent and open up new market opportunities.

> With so much prominence placed on the competency and effectiveness of
> executives, it is no wonder that they have become ubiquitous with firm
> success.1

On the flip side, in thir report entitled “Minimize Risk” the Association of
Executive Search Consultants summed up how much it matters when leader
appointment goes wrong.

> The risks associated with an unsuccessful hire can be catastrophic.2


HOW OFTEN DO LEADER APPOINTMENTS FAIL?

Research into failed recruitment of leaders is wide-ranging and varied, from
Kahneman, Sibony & Sunstein’s recent expose “Noise”3, to a flurry of studies
commissioned by management consultancies and psychologists1. The results are
alarming:

> Consistently, research indicates that the odds of a successful executive hire
> approximates a coin toss, regardless of whether the new hire is promoted
> internally or hired externally.1

Conventional leader recruitment is unreliable, it has a Performance Problem. The
success rate is an alarmingly low “coin flip” — 50-60%.1, 3


HOW MUCH EXACTLY DOES FAILED LEADERSHIP COST?

For some time, we have known that filling an organisation’s leadership with the
wrong people would cause long-term damage to an organisation and its employees.
Today, we have an even better understanding of the exact impact — and cost — of
poor leadership. With the data to quantify the cost; the intangible is made
tangible.

Firstly come the direct costs. The combination of hiring costs, compensation
while on the job, investment in the executive, severance and inefficient
repeated recruitment can easily take you up to three times the leaders salary.
And this is only the beginning.

Secondly comes the, often more hidden, cost of a breakdown in trust it will
cause among board members, employees, partners, and clients — particularly if
the leader makes their mark through a series of poor decisions. Add the directly
related costs such as departures of disgruntled staff, lost sales, damaged
customer relationships and so on into the mix and a failed hire can easily cost
ten times salary or more:

> The Conference Board, a think-tank, finds that the costs of changing bosses
> (severance, search, lost productivity during the transition, and so on)
> are generally equivalent to 5% of annual profit.4

Thirdly, beyond the direct financial impact that is readily quantifiable, Chief
Financial Officers are quick to point to a bad hire's indirect and, even more
costly, negative impact on morale and productivity:

> What the CEO [and leaders] control — the company’s biggest moves — accounts
> for 45 percent of a company’s performance.5

“McKinsey research indicates that companies that put talent at the center of
their business strategy realize higher total shareholder returns than their
competitors. Individuals who are top performers in highly critical roles deliver
800 percent more productivity than average performers in the same role. For a
median sized S&P 500 firm, unsuccessful appointments put >€450m of the firm’s
value at risk.” 6


A VERY EXPENSIVE COIN-FLIP

Include the full, broad-based negative impacts of failed leader appointment and
the cost of failure grows exponentially. In fact, experts like Bradford Smart,
estimate the cost of a “mis-hire” at leadership level to be at least 28 times
annual salary for vice presidents and executives. If, for example, we are
talking about a salary of $500k, that amounts to around $15m7. It would not be a
surprise if, for many companies, this is more than half of operating profits8.
Whether the leader appointment is a high profile disaster or a more mundane
quietly failed appointment — both are bad news. Bad for the leader, bad for
optics. Bad for results and bad for people.

> “Widely cited research indicates that nearly half of new CEOs don’t make it
> past 18 months, and the costs of replacing them are staggering.”2

Of course, it is worth pointing out that the reverse is also true; when the
selection is right, "high-performing executives can add millions of dollars to
their firms’ bottom lines.”8

To sum up, researchers confirm, hiring the wrong leader costs an eye watering 30
times salary, at least.


THE NEW MARKET ENTRY AND THE NEW CEO APPOINTMENT

Imagine another business decision facing a Board. Perhaps entering a new
geographical market. What would happen if the chance of success was estimated to
be around 50%– 60% — and the costs of it going wrong were staggering — at least
$15m?

No one would take another step until they had the opinion of experts. Someone
working within a properly structured and recognised method who could analyse,
define and describe the market opportunities and risks. And work with other
experts to build a solid business plan. These experts would have track record
and experience of increasing the probability of success in entering new markets
and achieving business plan goals. The recommendation would be expressed with
data and qualified judgment, and the decision would be signed off after scrutiny
of the facts. This decision would not be based on “gut feeling”. The new market
was not chosen because the CEO liked and knew the country from before or because
it was “just over the border”. It was chosen based on relevant facts and expert
judgement — and no doubt the return on the investment case was carefully
documented and factually followed up over time.


TRUST SCIENCE OVER CHANCE TO SAVE TIME AND MONEY IN LEADER APPOINTMENT

We are often motivated by our affinity bias — what we like, or availability bias
— by what is in front of us, when we make decisions. Because we know about our
own subjectivity, when we make important and costly decisions, like entering a
new market, we overcome these human conditions with facts, structure, expertise
and follow-up. By doing so we reduce the risk and radically increase our chances
of success. Apply the same reasoning and scrutiny to leaders appointment and
your organisation will outperform.

Science-based methods put to effective use by trained experts lead to better
hiring decisions. Even when conditions in which we make these decisions in are
increasingly complex and general success rate are dropping. Even if there is no
perfect solution to any prediction — success in a new market or in a leader
appointment — with science applied to selection it is possible to outperform.9

With the cost of getting it wrong so eye-wateringly high, why not trust science
over chance? To find out how to do that in practice — to secure diverse
candidates and appoint a leader with a success rate far, far better than a coin
flip — investigate MU Executive Search™.

MU Executive Search™ is tested and proven to be an inclusive, accurate and
reliably efficient alternative to conventional leader recruitment. It is
Executive Seach, evolved.10, 11, 12

--------------------------------------------------------------------------------


REFERENCES

1 Kiefer, K., Martin, J. A., & Hunt, R. A. (2022), p3. Multi-level
considerations in executive organizational transfer. Human Resource Management
Review.
2 AESC “Minimize risk” retrieved 10-04-2024
https://www.aesc.org/profession/minimize-risk
3 Kahneman, D., Sibony, O., & Sunstein, C. R. (2021). Noise: a flaw in human
judgment. First edition. New York: Little, Brown Spark.
4 Bower, J. L. (2016). More insiders are becoming CEOs, and that’s a good thing.
Business Review (18 March 2016)
5 Economist.com. (2020) “Take Me to a Leader”.
6 McKinsey & Company. (Retrieved 2024) “Increasing your return on talent: The
moves and metrics that matter”.
7 Smart, B. D. (2005). Topgrading: How Leading Companies Win by Hiring,
Coaching, and Keeping the Best People. Penguin.
8 Executive Springboard. “Taking the risk our of new executive hires”, (2017).
9 Solving the Performance and Diversity Problem with MU Executive Search™. MU
(2024).
10 Jonsson, E. (2023). Diversity analysis: Gender distribution in the MU
Selection process 2019-21. The Mercuri Urval Research Institute.
11 Jonsson, E. (2024). Recent Research on Inclusion and Diversity. The Mercuri
Urval Research Institute.
12 Jonsson, E. (2023) Success Rate for Leader Appointments. The Mercuri Urval
Research Institute.

--------------------------------------------------------------------------------




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 * Richard Moore
   
   
   
   CEO and Partner
   
   Mercuri Urval
   
   


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RELATED READING

 * The Curious and Costly World of Conventional Leader Recruitment
 * What Is the Real Cost of Failed Leader Recruitment?
 * CEO Letter


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