The direct replacement cost is the smallest component and the only one anyone counts.
Why it matters when the plan changes
Boards and executives approve assessment spend against the salary of the role, which is the wrong denominator. The relevant figure is the cost of being wrong, which includes the quarters of degraded execution before anyone acts and the decisions taken by the wrong person in the meantime. Ram Charan's account in Harvard Business Review put the failure rate of new chief executives at two in five within eighteen months, time enough for those decisions to compound. Priced against that, evidence is cheap.
The tension is that the full cost is genuinely hard to quantify and easy to inflate. Published multiples of salary vary widely and rest on assumptions that rarely transfer; even key person insurance, designed to price this exposure, covers only temporary cover and the recruitment and training of a replacement, the smallest component at stake. The defensible version reasons from the specific situation, naming which decisions the role holds and what a wrong call on each would cost, rather than quoting a general figure.
In practice
An organisation spends eight thousand on assessment for a role paying two hundred thousand, and considers the spend carefully. The role holds three decisions each worth several million to get right. The assessment budget was set against the salary, which is the one number in the situation that does not measure the risk.
Evidence
Key person exposure includes the cost of the period without the person, temporary cover, and recruiting and training a replacement.
Key person insurance, Wikipedia (2026)Chief executive tenure has shortened and a substantial share of appointments do not survive their first period.
Ram Charan, Ending the CEO Succession Crisis, Harvard Business Review (2005)
What it cannot tell you
The cost of a wrong leadership decision cannot tell you how likely a given appointment is to go wrong, only what the consequence would be if it does. It says nothing about which candidate is safer, and a large estimated cost does not by itself justify any particular amount of assessment spend.
Questions
Direct replacement cost, the period of degraded performance before anyone acts, the decisions taken by the wrong person during that period, and the disruption to the team around them. Key person insurance, as described in a 2026 Wikipedia entry, covers only the cost of temporary cover and replacement recruitment, which is the smallest of these components.
Because published multiples rest on assumptions about role, seniority and industry that rarely transfer, and because the studies behind them vary in method and definition. A figure quoted without its basis is a rhetorical device rather than a measurement of the situation in hand.
From the specific role: which decisions it holds, what the range of outcomes on each looks like, and how long a wrong appointment would take to identify and correct in this organisation. That reasoning is defensible and specific, which a general multiple is not.
Because salary is the available number and budgets are set by category. It measures what the person is paid rather than what they decide, and for senior roles those diverge by orders of magnitude, which is why the denominator is almost always wrong.
Usually the delay. Ram Charan noted in Harvard Business Review in 2005 that two out of five CEOs fail within their first eighteen months, which points to a slow recognition period rather than a single bad decision. That period is where early evidence has the most realistic effect.