Leaders play an important role in any organization. Great ones have a compound additive effect which we frequently celebrate. Are those accolades overstated? If esteemed polls and studies are to be believed, we seldom crack the 30-35% range of fully engaged, productive, and capable leaders. Perhaps that percentage doesn’t rise because organizations large and small have grown complacent with their intractable lousy leaders.
Lousy leaders most often lack the essential leadership abilities which others have mislabeled as “soft skills.” In truth, poor leaders often lack the “hard skills” required for their job too. Hard skills are the standard, industry-specific skill sets that by all accounts, are the price of admission. Nearly everyone in a given sector has these required skills to one degree or another, or they wouldn’t be there.
The variance that keeps lousy leaders in power is their knowledge or their perceived knowledge. Years of experience does not always translate easily into years of competence, but often, we mistakenly think it does. There is also nefarious knowledge; knowing trade secrets and where the proverbial skeletons are hidden within the organization. Mix in ego, fear, and the worry of humiliation, and you suddenly understand why some weaker executives are hesitant to act.
Isn’t the cost of inaction too high? For some, no, it is a bargain. However, for many, particularly small business owners, the price paid for lousy leadership is unknown. That’s no way to manage a successful business, so let’s attempt to codify the costs (or investments if you’re happy with performance) in four categories.
- Employee Turnover
- Customer Defections
- Drag on Productivity
- Discretionary Nonsense
Run the following conservative calculations over the last twelve month period for each of your leaders.
For Employee Turnover, estimate 20% of the annual salary for any employee that has voluntarily left the organization.
Calculate the number of Customer Defections under the leader’s span of control. In other words, how many clients did the leader have 12 months ago versus today? Turn that number into a percentage and then multiply it by four. (e.g. A 5% Customer Defection Rate x 4 = 20%.) Subtract that adjusted percentage from your expected profit.
Calculate the leader’s Operating Productivity by dividing the estimated revenue by the number of team members, (also considered the revenue per employee.) The estimated productivity drag of a lousy leader is 10% of the operating productivity.
Discretionary Nonsense is the total miscellaneous expenses you are accumulating to keep the lousy leader in a status quo position. This could be unusually large items on an expense report and any perks they have negotiated that others in the organization don’t have, i.e., company car. Also include potential court expenses, attorney fees, and if you are the kind of organization that is paying settlements for non-work related activities, those would be lumped into this category. By the way, if the line items in this category are higher than any of the others, you have far more significant problems in your organizational culture than any one leader.
The total of all four categories is the “tax” you and your organization are paying to keep the lousy leader in their position.
If you are a small firm, the leader is new, and the expense is manageable, this might be an acceptable number for you short-term. If the return on investment in this leader is unacceptable, you will need to use your discretion as to where this money could be better spent. Perhaps in better leadership training, development and accountability; or maybe, if you can catch them before they leave, in the promotion of the capable leaders who are already in your midst but have been hidden from view.
Conversely, you can make these calculations positively. No turnover is, neutral, client acquisition is margin added, and there is an uplift to operating productivity. You would be well-advised to share the wealth with these effective leaders; the odds are, they would reinvest in their team.
So, how much do you pay in lousy leader tax? Is it worth it, or would you prefer to expand your profit?
Also published on Medium.