How would YOU like to be rejected?

What do you do with the candidates you reject?

Lets start with the interviews themselves.
Actually, lets start with HR.
Isn't it funny how long it will take you to find a list of 5 candidates whom you actually want to sit down and talk with? And this is NOT because India is facing a huge talent shortage (although Infosys and their brethren aren't really helping by vacuuming up graduates by the millions and not really helping fill the pipeline).
No - it's because HR cant be bothered to actually take the time to understand what the fuck the job is all about, and what kind of skills (other than the rudimentary English, C++, and *insert degree here*) the job role might require.
Even if you had to hire an astronaut, and you asked HR to send you some resumes, they'd begin by asking you - what degree should your candidate have.Lets say you declare that it should be aeronautical engineering or astrophysics. Then they'll sleep through the rest of your well thought out detail on what the candidate may require, and flood your in box with a deluge of resumes who will all have degrees that begin with aero or astro. Aeronautical, Aerospace, Aerobridge, Astrophysics, Astronomic, Astrology, you name it. There'll be a candidate from it. OF course, they will all have about 3 to 7 years of work experience (since you said you wanted someone with 10). And all of their experience will be in software services companies, on projects that are in no way related to their degree.
In hindsight, I shouldn't have started with HR - that is a tangential take-off into a mindless frustrated rant, just waiting to happen

Anyway. Lets say that a few years later, you have found your 5 guys.
You call 'em in. Then for each candidate, you go through the mandatory minimum of 3 reschedules to accomodate for HR fuck-ups, candidates having urgent projects (which probably means they are interviewing somewhere else), and a inevitable 1 to 2 hour delay before the interview (the candidate is stuck in traffic, car broke down, security wont let him pass without a farcical bag check etc). Then you interview the candidates, and say you rank 'em from 1 to 5.
You go with an offer to candidate 1, but by the time HR has processed the offer, he has joined Infosys.
You go with an offer to candidate 2, he accepts (hurray!). You're on!

Now what.
I tell you what you do.
You assume that HR takes care of the other three candidates.
Lets them down gently.
Tells them that they narrowly missed out because a candidate with a slightly better fit in experience and qualification has expressed intrerest, but that they (the candidates) had a promising resume, and if ever anything similar opened up, HR would immediately throw their hat into the ring. And since they had already come so close, maybe they would make it to the second round of interviews directly.
Yeah.
Wrong.

They only way HR will do that is if you sit in a conference room and insist that they do it in front of you.

Otherwise, this is what happens:

You: Praise be to you O! HR representative (that's how you have to address HR - metaphorically speaking)
HR: Speak
You: As you know, candidate 2 has accepted. Would you be so kind as to get in touch with the rest of the candidates and inform them?
HR: Done.

Break

Candidates Phone: *Ring*
Candidate: Hello?
HR: Candidate 3?
C3: Yes?
HR: Hi this is HR Rep from Acme Rockets.
C3: Yes. Hello. How are you?
HR: Yeah. You failed the interview.
C3: Oh?
HR: Yup. You sucked at it. And what was that about the amount of money you wanted?
C3: Huh?
HR: Ha.Ha.Ha. You must have been kidding.
C3: Sorry?
HR: Anyway. Whatever dude. We'll call you if we need you.
C3: What?
HR: You're pond scum. Loser.
C3: hey! Waitaminute, you can't talk to me like that!
HR: Blow Me. *click*

Of course, I have exaggerated the exchange above for effect. But trust me, not by much.
Whether or not your HR folks use those exact words, the effect they have on a rejected candidate is very similar.

It never hurts to handle your rejects well. They become ambassadors for your company. (Not those white bulbous four wheelers, you jerk.) I heard terrible things about a very prominent company from a candidate they rejected. Instead of letting him down gently, the threw him off the roof, and tossed a bag of cement after him. Then they had the company bus run him over.
We're not talking fresh graduate level. We're talking middle management.
He looked like shit when I talked to him that evening.
He's never going to work for that company is his life, he told me.
And he drew conclusions about that company's culture, it's values, and it's relationship with it's mother among other things from the way he was handled.
Nobody's ever going to hear a good thing about this company from this guy.
A good, capable, connected guy.

Their loss.