It has to do with the cost of replacing a person in a CXO level position, or the cost of a bad promotion or hire at this level. This cost is real, it is likely to be much, much more than you think.
How do I know this? I have studied this topic for years; I have tested it with many clients, read the latest research about this and come to this conclusion: the cost of replacing a CXO or not hiring the right one can be 5 times their base salary. So, if you are paying someone a base of $250,000 and they leave your organization for another opportunity, it will cost $1.25 million to replace them.
How have I arrived at this figure? Consider the following:
- The cost to replace someone is easily 1.5 times their base salary. This fact is documented in “The Business Cost and Impact of Turnover” which you can find here.
- High performing executives generally have strong relationships with their best performers. When the executive leaves, they will likely take other high performing leaders with them at some point. It may not be immediate, but it will happen and there is not a lot you will be able to do about it, except take extra steps to keep those high performers REALLY engaged. Still, some will leave. It is well documented that employees leave primarily because of relationships, not due to loyalty for the organization.
- While the position is vacant, the productivity of the department or division this departed person ran is seriously at stake. Even if you have a replacement all lined up because of an up to date succession planning process, it will take time to build relationships, establish trust needed to influence and generally have the staff be reenergized, reengaged and refocused on the main priorities.
- Your focus as the boss of this CXO is somewhat compromised as a result of the departure. You have to reallocate how you spend your time so the division doesn’t lose too much ground. This comes with a cost.
There are other factors to consider, yet I hope you get the point.
Oh, one other thing…where does this money come from? I know of few companies who have a budgeted line item for “cost of CXO turnover”, so the money comes from your profit line. This is a discussion you and your CFO can have the next time you have lunch together.
Now I’m going to tell you something you probably won’t do. Ensuring you make the right (not necessarily the best) hiring decision at the CXO level is arguably the most important and profitable decision you will make in your leadership position. If you want to change and get better results, it is all laid out for you in an article I wrote several years ago entitled, “Hiring For The Long Term” and it can be found here.
Even if you take the time to read the article, you probably won’t commit to do all of what it suggests. You might do some of the steps; probably not all of them and that’s up to you. However, based on my 30 years of experience, companies who do follow ALL the steps outlined are MUCH more profitable than those who don’t.
Question: How has this insight changed your thinking and what will you do about it? You can leave your response below.
Photo by: Janeen