I’m reading a fantastic book right now called “Pre-suasion.” It came out about a month ago. I just finished a section on how the ethics of the leaders in an organization determine the future costs in a significant way. More specifically, now non-ethical leaders will financially ruin their company!

It just so happens that Wells Fargo has been in the news recently for just this particular issue. The CEO may not be financially hurt, but Wells Fargo has been dramatically hurt financially because of this episode. Here is a summary of what the book’s author (Robert Cialdini) said:

When the leadership of an organization asks, or even implies, that their workers take shortcuts or even overtly take advantage of their customers, there will be three outcomes that will, in the end, cost that organization significant amounts of dollars (millions if you’re that large and hundreds of thousands if you’re smaller). What’s really surprising is that these losses do not even include loss of customers! That is on top of the losses I’ll describe below.

The first major hit is poor employee performance. When the employees see that their leadership is willing to be less than ethical, their stress level goes up and their engagement level goes down. This means that every project and work effort you’d like them to get done will take longer than necessary and have lower quality than you’d desire. Rework ends up being the norm.

The second major hit is employee turnover. Those employees described above are looking for a way out. They hate working for you and want to find someplace where their values and the organization’s values are at least a bit closer. If you have an HR department, they can calculate for you pretty easily how much this is costing you. But to help you out a bit; the range for replacing a good employee ranges from 10% to 200% of their annual salary depending on their level of expertise.

For example, to use the low end, a $10/hour worker working full time earns approximately $20,000/year. We assume that this is an entry level job and therefore relatively easy to train a new employee. This means that your advertising for the new job, your interview process (the time it takes for people to speak them) and the training you provide will cost roughly $2,000 to replace that worker. You may not think that is much, but remember, that’s an entry level job.

For a mid-level person, let’s say a $50,000/year job, you will have to plan on 20-25% cost to replace them. That’s about $12,500! The interviewing and training takes longer, but more importantly, projects are slowed down, which may increase that amount significantly. Let’s say you lose 4 people at this level – that’s $50,000 it cost you.

For a high end person, say $100,000 or more, your cost to replace them will be 100 – 200% of that annual salary – figure $100,000 - $200,000! This is because of the influence you expect from them in all areas of your business. Are you willing spend that kind of money?

The third, and believe it or not, most costly result of unethical management is employee fraud and malfeasance. Think about it, the turnover of employees will be your honest employees. The dishonest ones will be happy to stay because they know they can take advantage of it! It is estimated that trillions of dollars are taken from organizations in America through this issue. Do you want that kind of person working for you?

Those of you who read this are, I assume, not the kind of people that fit into the unethical category…at least I hope that is true. So you may be thinking, “interesting data, but not applicable to me.” However, leaders you may work with or are on your team will cause the same effects if they are unethical. I’ve worked for them and with them and I can tell you it hurts the organization no matter what level it is on.

Letting everyone in your organization know that unethical behavior will not be tolerated and the cost it brings to your organization is a useful tool to help curtail it. But it needs to start with you!

Our training helps enable leaders to be ethical and encourage their colleagues and team members to be ethical as well. You can’t control everyone’s behavior, but you can certainly help influence it. If you would like more information on how we do this, contact me at john.reeb@crestcom.com.