Ever wonder why companies so carefully scrutinize candidates with interview processes that seem like, well…overkill? A few years ago, I had a staffing relationship with a client that interviewed senior level executives as many as 8 times before a decision was made. Overkill, right? Or is it? When a hire goes wrong, the loss extends far beyond the loss of wages paid. The true cost of a bad hire can have a huge impact on a company’s finances, future and culture.
Sobering Statistics
- Harvard Business Review found a startling 80% of turnover can be traced back to poor hiring decisions.
- The U.S. Department of Labor estimates that a bad hire can cost a company 30% of an employee’s first-year earnings in direct costs.
- A CareerBuilder survey found that 74% of employers have made a bad hire in the past year.
- SHRM research indicates that the replacement cost for an employee can be as high as 50% to 60% of their annual salary, and the total costs can be even higher, ranging from 90% to 200%.
Direct Costs
When calculating the true cost of a bad hire, you must include the direct and indirect costs (described separately in this article). Direct costs below.
- Recruiting and Onboarding: When you add up the cost of job postings, recruiter fees, time spent screening by corporate recruiters and hiring managers, and background checks you get a bit closer to the real numbers but you are still not there. When a bad hire is made, all of those costs have to be repeated.
- Wasted Compensation: Every day an ineffective staff member remains on the payroll wastes salary and benefits and possibly even bonuses. For a mid-level role, this can amount to tens of thousands of dollars before termination.
- Training and Development: When calculating the real cost of a bad hire, many companies do not consider the time and resources invested in training a new employee that doesn’t work out. This includes the valuable time of managers tasked with getting the new hire up to speed.
- Severance and Legal: Severance pay is common and potential legal costs are incurred if the departure leads to a dispute.
Indirect Costs
The most damaging costs of a bad hire are often the indirect, intangible ones. Difficult to quantify, “hidden” costs can negatively impact an entire organization.
- Productivity Reductions: Underperforming employees delay projects, miss deadlines, and affect the overall quality of work. A study by Gallup found that under-performing employees cost U.S. companies between $450 billion and $550 billion annually in lost productivity.
- Morale Poison: A survey of financial executives by the Orsus Group found that a startling 95% reported a bad hire negatively affected team morale. This can lead to increased stress, burnout, and, ultimately, higher turnover among valued employees.
- Wasted Time for Managers: Research from Harvard Business Review found that leaders spend an estimated 17% of their time dealing with poor performing employees. (Source: Vestd) That time would be better spent mentoring high-performers, developing new strategic initiatives, or driving business growth.
- Reputational Harm: I recently learned of an under-performing employee that accidentally released a document showing that a company took manufacturing shortcuts that cost them a $10 million a year client. When a bad hire interacts with clients or customers, a company’s brand reputation is at risk. Poor service, dishonesty, broken promises, and, especially unprofessional behavior can lead to a tarnished image that may not even be repairable. It can also hurt future recruiting efforts.
Avoiding the Costly Mistake
The best way to eliminate the costs of hiring a poor performer is to prevent them from joining the company in the first place. Be proactive!
- Refine and Prioritize the Hiring Process: Elevate hiring beyond a transaction into a strategic investment. Take the time to define clear job descriptions and get the requirements approved by all stakeholders.
- Implement an Interview Structure with Multiple Decision-Makers: Well thought out, standardized procedures involving multiple decision-makers, can provide a more objective assessment of a candidate’s skills and cultural fit and reduce common biases.
- Validate Skills: Implement skills-based assessments. These are already quite common and gaining in popularity. I also recommend you perform rigorous reference checks with people outside the references you are given. LinkedIn makes this easy.
By understanding the “real” multifaceted costs of hiring a poor performer, businesses can easily justify investing more time and resources into building a more effective hiring strategy. Doing so will protect a company’s finances and build a stronger, more resilient organization.
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