The hidden budget line destroying your bottom line

There is a budget line in your business that no one is managing. According to research by Leadership IQ, confirmed across multiple subsequent studies, the average 18-month failure rate across industries is 46%—meaning nearly one in two hires either underperforms significantly or leaves within 18 months. The cost of each of those failures runs between 50% and 200% of that employee’s annual salary, accounting for recruiting costs, onboarding investment, lost productivity, team disruption, and replacement.

Run the math. A company making 50 hires a year at average fully-loaded salaries of $95,000—not a large organization, just a growing one—is sitting on a financial exposure somewhere between $1.1 million and $4.4 million annually. Not from a failed product launch or a bad acquisition. But from screening decisions made with confidently unreliable information.

Most executive teams have no visibility into this number. It doesn’t show up cleanly on a P&L. It bleeds out across departments—in manager time absorbed by struggling new hires, in team productivity lost during extended onboarding, in recruiting costs paid twice when a role has to be refilled. The bill arrives in installments, which makes it easy to miss. But it is very much being paid.

YOU’RE MEASURING THE WRONG THINGS

Here is what makes this particularly frustrating: Most organizations have more hiring data than they’ve ever had. They track time-to-fill, cost-per-hire, offer acceptance rates, applicant volume by source. Dashboards are full. Reports go to leadership quarterly. And somehow, the same expensive mistakes keep happening—the impressive resume that doesn’t survive 90 days, the candidate who checked every credential box and delivered none of the results.

The data isn’t failing because there isn’t enough of it. It’s failing because it’s measuring the wrong things. Time-to-fill tells you how quickly you processed candidates. It tells you nothing about whether you hired the right person. Those are fundamentally different questions, and most recruiting metrics are only equipped to answer the first one.

The consequences of this measurement failure extend beyond individual bad hires. Joint research from Harvard Business School and the Burning Glass Institute found that fewer than 1 in 700 hires at companies that announced skills-based hiring initiatives were actually affected bythe change. For every 700 people hired at a company that publicly committed to evaluating candidates on skills rather than credentials, 699 of them still got the job the old way.

That is a significant finding, not because skills-based hiring is a flawed idea, but because it reveals precisely why the financial exposure isn’t shrinking. The problem has been named, but the measurement systems that would actually fix it haven’t been built.

The academic evidence on why this matters financially is stark. A landmark 2022 meta-analysis in the Journal of Applied Psychology—one of the most rigorous re-examinations of personnel selection research in decades—found that resume screening produces validity coefficients in the range of 0.2 to 0.3. In practical terms, using a resume to predict whether someone will be a high performer is about as reliable as using their commute time—a piece of information that’s easy to measure but tells you almost nothing about how someone will actually perform.

Every year that an organization screens primarily on resumes and credentials, it is making its most consequential people decisions with a tool that research has shown to be barely better than chance. And it is paying, repeatedly, for the outcomes that tool produces.

A BETTER WAY

The evidence points to a better path. Workday’s 2025 workforce research 2025 workforce research found that hiring for demonstrated skills is five times more predictive of job performance than hiring for education—and more than twice as predictive as hiring for work experience. That predictive gap translates directly into financial terms: fewer failed hires, lower replacement costs, faster time to productivity, and reduced drag on managers and teams.

There is also a revenue side to this equation that gets less attention. McKinsey research has identified an 800% productivity gap between high and low performers on complex work. Eight times the output. Same title. Same role. Same salary. When hiring systems are designed around credential screening rather than capability assessment, they consistently underperform at identifying the candidates responsible for that upside, because the competencies that drive exceptional performance rarely announce themselves on a resume.

The organizations winning on talent aren’t just avoiding bad hires. They’re accessing a fundamentally different tier of performance. That’s not a talent strategy argument. That’s a revenue argument.

Medical schools confronted an identical version of this problem two decades ago. Traditional admissions metrics—grades, test scores, institutional pedigree—predicted who could pass exams. They were far less reliable at predicting who would become an exceptional physician. Leading schools began evaluating candidates on demonstrated capability and trajectory rather than credential accumulation. The candidates admitted under those frameworks didn’t just keep pace with higher-credentialed peers. They frequently outperformed them.

Corporate hiring is at the same inflection point. The methodology exists. The evidence base is established. What’s missing, in most organizations, is the decision to connect hiring metrics to financial outcomes, and to hold the function accountable for both.

The question for CEOs and CFOs isn’t whether your recruiting function needs better tools. It’s whether you can account for what your current approach is costing you. Most organizations can’t, because they’ve never built the measurement systems that would make that cost visible. Until they do, the budget line keeps bleeding, hire by hire, quarter by quarter, invisibly enough that no one is required to explain it.

That’s not a talent problem. That’s a measurement problem. And measurement problems are entirely within leadership’s control to fix.

Natasha Nuytten is the CEO of CLARA.