Is Executive Assessment Worth the Cost?By: Michael A. Peterman
Many companies rely on firms like RHR to conduct an executive assessment as part of the selection process for enterprise critical roles. Executive assessment is meant to provide an expert and objective evaluation of a given candidate’s fit to a particular role, typically involving an extensive interview in combination with additional psychometric testing.
Not long ago, a chief human resources officer (CHRO) told me that a colleague of hers was asking about inexpensive executive assessment options. The CHRO responded by describing the phrase “inexpensive executive assessment” as the very definition of an oxymoron. Well, as someone who spends a lot of his time conducting executive assessments, I really can’t disagree with that statement. After all, with an industry price tag that often hovers around $20,000, an executive assessment represents a significant investment. Therefore, some organizations naturally question whether it provides sufficient value in return.
But, even though executive assessment costs are significant, I find they pale in comparison to those of a poor hiring decision. Indeed, among the executive ranks, a poor hiring decision can lead to a number of undesirable outcomes, including diminished engagement, increased attrition, productivity losses, misguided strategic decisions, and a misapplication and/or underutilization of valuable company resources. What's more, replacing an ineffective executive is an expensive and time-consuming endeavor that often takes months and costs hundreds of thousands of dollars. For these reasons, many have tried to quantify the true cost of a bad executive hire. Estimates vary widely, ranging from 2.5 to as much as 27 times an executive’s base salary.
Somewhat conservatively, let’s assume a total cost of roughly five times the executive’s base salary. With that estimate as a starting point, let’s figure out the business case for executive assessment. In the absence of executive assessment, organizations reportedly have about a 50% hit rate in hiring senior executives. So, an organization that has to fill 10 executive roles can expect to make bad choices on approximately five of them. Conservatively, let’s assume that by utilizing executive assessment, organizations can raise the hit rate from 50% to around 80%. (Incidentally, we actually have internal data indicating RHR's hit rate to be considerably higher than 80%.) With an 80% hit rate, an organization selecting 10 executives would miss an average of only two hires rather than five.
Let’s say the average salary for those 10 executives is $500,000 per year. Using the estimate cited above, a bad hire costs an organization an estimated five times the executive’s salary. In the scenario outline here, a single bad hire would cost an organization $2.5 million, and five bad hires would cost an astonishing $12.5 million. Now, what if the organization makes sure each candidate goes through an executive assessment? As noted, doing so, on average, would reduce the number of bad hires for every 10 executives from five to two. The reduction translates to an estimated savings of $7.5 million for the organization. If we assume the executive assessment fees total $400,000 (two candidates assessed for each of the 10 roles at a cost of $20,000 per assessment), we have an ROI of 1,775%.
HR and talent management are often maligned for not driving demonstrable value for the enterprise. However, by leveraging executive assessment, they can have a huge impact on the bottom line by reducing poor hiring decisions and saving their organizations millions of dollars.