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We often do executive COV (Cost of Vacancy) assessments for our clients to better assist them in ascertaining the actual numbers in daily, monthly, and quarterly hard costs of having a Sr. Executive or C-Level Leadership position remaining unfilled. The business impact of a talent shortage that results from a gap between the time the talent is needed and the time the talent is acquired is calculated as the Cost of Vacancy.

In his article, “Calculating the Cost of a Vacant Position”, HR guru, Dr. John Sullivan outlines the real cost of job vacancies.  Dr. Sullivan’s calculations consider the trickle-down effect that vacancies have on the rest of the organization. Don’t be fooled into believing that open positions cost you only some overtime. The truth is, vacancies can expose your organization to unforeseen and unacceptable expenses such as those outlined below.

A good and simple way to understand this is by using one of Dr. Sullivan’s examples;

“If an airline bought a new 747 and then let it sit for two months on the runway because they didn’t have a pilot, what would the cost be to the airline?  In other words what is the cost of a vacant position?  Many firms calculate the cost of a hire, and some go so far as to calculate the cost of a bad hire, but very few have taken the time to calculate the cost of a vacant position.  These costs can be significant: anywhere from $7,000 dollars per day to $50,000 per day for an engineering position.  Key Leadership positions can cost as much as a million dollars per week. 

Couple these amounts with the fact that the length of many vacancies often exceeds 100 days, and you are talking about some serious financial impacts ($7,000 X 100 days = $700k…again, that’s not even for a leadership role).  Although I’ve done numerous calculations of the cost of a vacancy (COV), I have generally found that the results are less “believable” when the calculations are done by outsiders or by HR professionals.  Instead I have had better luck when line managers do the actual calculation (even though the numbers might be off some).  Also, the results are more likely to be used by managers to put pressure on retention programs and on speeding up the recruiting and hiring process.”

Numerous national studies show that companies spend an average of 73 days to fill a position.  You can take that number and even use a broad method if you don’t have the position-specific data available to determine the revenue your company is failing to generate due to a vacant position.

For example, with annual company revenue of $20,000,000, 50 employees, 230 working days in a year, and 73 days to fill a position would estimate the total cost of vacancy at $126,957  ($20M ÷ 50 ÷ 230 x 73 = $126,957).  And again, that was broad.

A simple method you can use to quantify an employee’s actual value is Harvard University’s study that indicates an individual’s value to their company is between 1 and 3 times their salary, and calculates each employee’s value as a multiplier of their salary.  Some experts have found 3 times the salary to be most accurate (particularly with leadership roles), however, you can utilize 2X a salary safely.

For example; with a $150,000 annual salary, a productivity multiplier of 2, 230 working days in a year, and the average 73 days to fill a position, the total cost of vacancy is $95,217  ($150,000 x 2 ÷ 230 x 73 = $95,217).

It is crucial that you don’t develop a “we’ll make do” attitude due to the lack of time or resources for acquiring top executive talent to fill vacant leadership positions.  When you’re looking to acquire leaders, it’s essential that your organization has a well-developed plan for screening, recruiting, training, and retaining executive leadership.  While there are costs associated with acquiring and retaining highly qualified and top performing staff, that is money well invested in the health and growth of your organization.

Very few companies actually know the collective costs and impact of a prolonged top-level vacancy, which is why a common reaction to these numbers is typically surprise, and sometimes even disbelief.

However, there is absolutely zero magic to determining the overall negative impact, financial and otherwise, as these results are simply based on numbers and factors directly related to the role’s departmental and overall company reach, scope of responsibilities, and bottom-line numbers that the role directly contributes to. 

For example;

Is this CEO, or Chief Financial Officer, or Chief Human Resources Officer, (or whatever the leadership position is), involved in compliance?

• Quantify realistic (not pie-in-the-sky) losses related to not having this executive to keep your company compliant (fines, lawsuits, etc.).

Is this Sr. or Executive Leader responsible for identifying significant savings in taxes, employment, operational costs, benefits, or otherwise?

• The loss of strategic or projected savings to your company’s bottom line most definitely has a largely profound impact while this role remains empty.

Is this executive leading a specific team?

• If so, that team is most likely not effectively producing or executing at full potential.  And, if someone else on your team is pulling double duty to take up the slack then they’re running twice as many projects and money is guaranteed to be slipping through the cracks.

How much does this Leader directly and indirectly contribute to your company’s gross profit margin?

1. Direct Cost of a Vacancy

Direct cost is the most tangible as it is the literal loss of revenue and productivity due to the loss of an employee.

2. Indirect Cost of a Vacancy

Indirect cost covers the effect a vacancy has on the department it occurs in, and the consequences of leaving the position vacant.

3. Risk of a Vacancy

Vacancies increase the risk from external forces a company faces. The loss of competitive advantage and potential loss of market share are components of risk.

Also, if on-going vacancies are a result of a slow recruiting process or limited resources for recruiting, you risk losing top executive candidates to accepting other positions – especially in a full employment market, and by the time you do make a hiring decision, you actually fill your position with a lower quality hire.

WHAT’S THE COST & IMPACT OF A BAD HIRE?

CareerBuilder just did their annual study (which you can look up online, and I’d imagine these numbers will continually go up as they have been) 41% of the companies surveyed say a bad hire in the last year has cost them at least $25,000.00, and 25% of companies surveyed said a bad hire in the last year has cost them at least $50,000.00.

In our very own experience here at DB Search Group, we’ve found that 38% of why companies hired bad company leaders was that they needed to fill a leadership position very quickly.  I would bet that these particular companies AT BEST were either relying on applicants from their job posting, or using multiagency, non-exclusive contingency staffing companies, and were actually seeing the best of a bad lot.  That’s where that typically leads.

à In the last 6 months alone, we’ve had a total of 271 companies tell us the reason they’re refilling an Executive Leadership position is because the prior one “just didn’t work out” and that they made a bad hire, which includes not being able to retain good leaders due to not having a comprehensive executive talent engagement process that would’ve targeted a decisively more mutually aligned candidate on the front-end.

BOTTOM LINE: This should all sensitize you to the fact that there are huge daily, weekly, and monthly economic consequences of a vacant Senior, Executive, or C-level Leadership position within your organization, or worse yet, making a bad hire by not proactively having a highly effective executive talent plan.

Really step back and take a true look at the impact this has on your customers & clients, your prospects, your department, and all other areas.  What does this all add up to in lost GP for your company, and how deeply does that impact your bottom line overall?  There are several formulas that are adaptable for every organization, and knowing the cost of the vacancy illustrates the urgency to widen the scope of viable recruitment solutions.

How about you?  Do you know your numbers?  Would you like us to do a deep dive and perform an absolutely free detailed Cost of Vacancy assessment using position-specific data analysis for a particular open leadership-level role within your organization?  Contact us today!