The process of hiring good mods is an arduous one. It involves trusting someone with a portion of your site, and once you hire them, they become a representative of you. Because of that, it's important to make the best decision as possible when you're adding help. Before I detail how to do that (or rather how I believe one can do that), I'd like to talk a little about when to hire a moderator, and why you should hire one.
Mods are like your arms. You can live without them, but having them make life quite a bit easier. Unlike arms, however, you should recruit mods because you need them- you don't want them idling around doing nothing. Does this mean that you shouldn't have mods immediately after starting a forum? I personally don't like hiring mods so quickly, but plenty of people advocate it. Hiring a mod early, the need is for them to post. After you get past that first leap, the need starts to change. You may need them to post, but their main focus might be to oversee the forums. As your site grows, the need will probably be more specific- moderating a specific forum, for instance.
So, that brings us straight into the first step of hiring a moderator. Assess the need. The need is the reason you're hiring a moderator, and it will shape your potential candidates.
Your candidates should probably be from the member base. Is bringing someone from an outside source (such as the Community Cooperative forum right here at TAZ) a bad thing? Not necessarily. However, remember that such a mod is an outsider. The doesn't have a history with the member base, and is essentially a mercenary. They were never members there, so they wont think like a member. They're just a mod. It's also better if you don't know your mods in real life- keep the internet on the internet, and the real world in the real world. Once they start pouring into each other, it could cause trouble.
The potential mods should be active. Active, however, doesn't necessarily mean posts a lot. Mods, by nature, are lurkers. If you are just starting up, you probably need someone who starts a bunch of threads. Later in the game, you want someone who's calm, spends a good amount of time in the area that needs some help, and when (s)he posts, posts well. Open up your word processor, take notes, look for potential candidates. Write up a list, and do your homework on them. List their pros and cons. Find out personal information they posted on your site. Get to know them. Ask your current staff (if you have) who you think would be appropriate for the job. Eliminate those you think just wouldn't work. Never, ever compromise. If you can't find anyone, then you'll have to do without. Chances are, one day you'll make a bad moderator choice. It happens to most people who have more than just 2 or 3 mods. That doesn't mean you should wait for it- go in with the attitude that you wont make the mistake.
Look at the personality types of your potential candidates. Think of what being a mod means- they may need to ban people they consider friends. If you don't think that they can take the heat, don't let them get near the kitchen. Being a mod often involves being criticized, too. Believe it or not, often the person who is friends with everyone isn't the best person to be a mod. Be careful with who you pick, because you can end up driving a good member away. Being a mod isn't for everyone, after all.
After you're done cutting down your candidate list, pick the three best who are on there- if you even have that many. Obtain an IM account- you need to talk to them one on one. If they don't have an IM account, set up a little chat room using meebo or something similar. Interview each of them. Ask them if they're willing to become a mod. If they say no, thank them for their time and end the conversation (or talk if you want to). If they say yes, on to interview time.
First thing to do for your interview is to make sure that they understand all the negatives about being a mod. They won't be a member anymore. They may need to discipline people they consider friends. They'll be taking criticism. It takes up time. It requires a large degree of dedication. Make sure they know what to expect- and throw everything at them that should make them want to refuse the job- a truly sane person wouldn't touch moderating with a ten foot pole. Ask them why they want to be a mod. Ask them what they think they can do to help. Talk to them about leadership positions they had in real life, about getting into fights with people, about taking criticism. Relate it back to situations they've experienced. Make sure that their attitude is right. Keep on pressing for more and more. You want someone who is truly dedicated. Then thank them for their time, and say that you'll get back to them.
Save the conversations. Review them, reread them, pick them apart. If you think it will help, print them out and annotate them. If you have a mod team, give the conversations to them and ask for their opinions. Then go back to your need, and figure out which one fills it the best, look at their past actions, look at them as a whole, and decide which, if any, are best for the job. Remember, never lower your expectations.
When you first add someone to your mod team, you want to think of it as a trial run. Make a new mod usergroup with limited power, see how they do as a mod, and keep on taking notes. Before becoming a full doctor, you have to intern. That's essentially what the first month of being a mod is- on site training, getting acclimated. Provide some literature for your mods- other articles here give some very good adivce on moderating. Beyond that, make it clear what you need them to do.
Hiring mods doesn't end at just that. As you have more mods, you have to get more organized. Figure out the most efficient way to organize your mods... at first, probably just as super mods, later assigning specific areas to work on as the site grows. The needs of your forum change over time, after all, and so do the roles of your mods.
Necessity is the mother of modship.
Here are some other things you may want to read on the subject:
RHawes post outlining the difference between a good member and a good mod.
Kathy's article on choosing moderators.