Any good company knows that you want to make the correct hire the first time. A bad hiring decision can impact a company in many different ways. Unfortunately, too many companies are in a rush to fill a position and don’t take the necessary steps to make sure the chosen applicant is the right fit. Making the wrong hire is a nightmare for HR professionals, and when it is discovered that a hiring decision was wrong, it can become one of the stickiest HR challenges and cause a company to face more than just the financial impact of having to go through the entire process again. Great companies know the secret – the cost of a bad hire is not worth it, so it is important to have a process in place that will hopefully alleviate this potential negative impact.
So what is the overall cost of a bad hire? From the outside looking in, it doesn’t seem like the cost would be that great. When you fully examine every aspect from hiring to cleaning up the mistakes that might have been made by the employee, the costs can escalate beyond what anyone might imagine. There are the overt costs, which are easy to see and realize, but then there are the hidden costs that help to raise the cost of hiring the wrong person to an entirely different level.
Take, for example, a study that provided the numbers for a company that hired an employee at an annual salary of $62,000 per year, who somehow managed to remain in his position for two and half years. The total costs of a bad hire for this company was an estimated $840,000! The things associated with the cost of this bad hire included:
- Hiring costs
- Total compensation
- The cost of maintaining the employee
- Disruption costs
- Severance pay
- The mistakes, failures, and missed business opportunities1
The overt costs are things such as the hiring costs, compensation, costs of maintaining the employee, and the severance pay. These are the things that are easily measureable by looking at the bottom line. The hidden costs are those things that include disruption costs, as well as all of the mistakes, failures and missed business opportunities that the employee may have caused. The loss of quality from this position costs the company due to the disruption of potential business coming in as a result of the inefficiencies. When a person that is hired is not equipped to handle the position, mistakes are made with clients, which then amount to failed business opportunities. These types of things impact the overall health of the business by lowering the potential for growth and business development.
The biggest question, of course, is why companies make bad hires in the first place? This can be due to several reasons. HR professionals are often times pushed to meet a deadline for hiring, so they are forced to focus more on the deadline rather than focusing on finding the most qualified candidate for review and final decision. Nothing positive is gained by pushing to meet a deadline to fill a cubicle, rather than ensuring the person hired is the best fit for the company. Another reason might be that company’s compromise. Often times, a decision will be made to settle for someone rather than seeking the best person for the job. Acquiring talent leaves no room for compromise. For a company to move ahead, they need to find the BEST talent. This requires looking past potential, or other things that come into play when considering a candidate, and making it a point to only hire the best fit.2
Another secret that great companies know is that the cost of a bad hire will vary based on their pay scale. The U.S. Department of Labor estimates that the average cost of a bad hire is around 30% of the first year earnings of the employee. By using this model alone, it’s easily understandable that an employee that earns $250,000 a year will cost a company $75,000, while an employee that makes $30,000 per year will cost $9,000 in the event of termination due to a bad hiring decision. In any case, a bad hire will cost a company thousands of dollars, and this does not count the impact this hire had on productivity and the morale of the other employees.3
So if the great companies know the cost of a bad hire, what is their secret to avoiding this pitfall? For any company not wanting to muddle through a bad hire, a thorough hiring process must be in place and it must take into account several factors. When a company has a strong understanding of their internal and external parts of their hiring strategy, it can make a world of difference in the overall experience of making the right hire.
- Seeing the big picture (know your market, and the talent that is available)
- Understand the corporate culture of your own company
- Develop a strong sourcing strategy
- Screening and selection (measure competencies, cultural fit, etc.)
- Reference checks (as well as a full employment screening/background check)
- Relationship management (assimilate them into the company culture as soon as possible)4
An infographic5created by HRmorning.com shows exactly what the great companies already know about the costs associated with a bad hire. It explains the pitfalls many companies fall into and how they get there, as well as examines the costs associated with a bad hire based on the pay grade of the position. This is a cost that can easily be avoided by every company and should be avoided if things are done properly. Finding the right candidate can be a challenge, but performing due diligence by creating a process that thoroughly vets candidates and understands what the company needs is a way to ensure you make the correct hire.