The cost of poor leadership

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Poor Scores for Leadership Quality
The Hidden Costs of Poor Leadership

This article analyzes the effects and costs of poor leadership and recommends countermeasures.

Almost every company complains about a "shortage of skilled workers." The labor market has changed completely. Companies compete for qualified employees - and workers now have a choice: they can choose from many job offers.
This competition forces companies to be "attractive" to employees while keeping turnover under control.

Numerous studies examine the causes of high turnover, low job satisfaction, and the resulting effects, such as quiet quitting.
The latter is particularly examined annually by the renowned Gallup Institute - with alarming results:

16% of employees have mentally resigned, and 70% have little or no emotional attachment to their employer. These employees are open to switching jobs and are not very engaged. Only 14% of employees are highly engaged in their work. High turnover can ultimately lead to the loss of critical know-how for German companies, as knowledge and experience are lost with each departure.
Source: Gallup Study 2024 | Management Blog (wiwo.de).

Our current survey from June 2024 among 6,500 LinkedIn users (leaders and HR professionals) shows similarly sobering results:

When asked in more detail, the following reasons were most commonly cited for these poor ratings:

• There is too little feedback
• Appreciation is expressed too rarely or superficially
• Direct personal contact suffers in the digital age
• Leaders complain about having too little time for leadership and being too tied up in administrative work
• Good leadership quality is neither evaluated nor rewarded in most organizations

Defining "Poor Leadership"

To recognize poor leadership, clear criteria are needed. These are often missing in organizations.

• "No Time": Leaders take on too many operational tasks themselves and have no time for leadership duties. Instead of being responsible for employee development and process improvement, they focus on productivity. Short-term problem-solving often takes precedence over long-term improvement strategies.

• Management by Exception: This leadership behavior only steps in when serious mistakes occur - and then reacts harshly.

• Laissez-faire: Leaders avoid intervening even when necessary, letting negative developments run unchecked - sometimes out of fear of conflict or the effort involved.

• Top-down Leadership / "Command and Control": Decisions are made over the heads of employees, which leads to long-term demotivation and passivity.

• Narcissism: Leaders prioritize their own interests, neglecting employees and company goals.

Poor leadership means that employees are not developed and cannot fully realize their potential for the company. A leader who inhibits team performance through poor communication, lack of role modeling, micromanagement, or an authoritarian style ultimately reduces company output.

The consequences are diverse: Employees or entire teams may "quiet quit," or they may work hard - but in the wrong direction because goals weren't clearly communicated. Poorly led employees become disengaged and passive. This leads to missed goals and increased pressure. Eventually, employees mentally check out, absenteeism increases, and turnover rises. According to the Gallup Study, this applies to 70% of employees.

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The Cost of Poor Leadership:

Various studies estimate the economic cost of employee turnover and poor leadership in Germany at up to 167 billion euros annually (see Gallup, Forbes).

However, the consequences of inadequate or poor leadership are rarely considered comprehensively within companies.

The National Business Research Institute has calculated that the cost of one resignation amounts to 100% to 150% of the annual salary. Even if we assume "only" 120%, one must ask: Why are these costs so rarely discussed?

Sample Calculation:

A construction company has a turnover rate of 21%. The average annual salary of a manager in this sector is € 65,725. A blue-collar worker earns around € 38,000/year on average. A company with 500 employees loses about 85 people annually with a 21% turnover rate. Assuming 50% of this is unwanted turnover, about 42 unexpected departures cause significant loss of knowledge and performance.
Good leadership could reduce a portion of the unwanted turnover (by about 20%), leaving only 34 employees departing - 8 fewer.

This would save the following costs: (Calculated based on 4 employees in each salary group)

4 employees * 120% * € 65,725 = € 315,480 (middle management)
4 employees * 120% * € 38,000 = € 182,400 (blue-collar workers)
Total cost savings: € 497,880!

If a leadership development program cost € 100,000, the remaining contribution margin would still be almost € 400,000! That's strong, data-driven justification for an effective leadership development program.

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About the Author:

Tom Senninger

Tom Senninger is a personnel and organizational development expert and has been running leadership development programs for 25 years. Weiß & Senninger The Leadership Experts Platenstr 6 80336 Munich 089 97392288