The true cost of a bad hire
We have all experienced the impact on company morale when a bad hiring decision is made. Staff are negatively affected when they work alongside someone who is not pulling their weight, is incompetent or unable or unwilling to follow company policy.
You may start to see people actively disengage from working on projects with the ‘bad apple’, or becoming burned out from doing twice as much work to compensate. It can be especially damaging to team commitment when an ineffective supervisor or manager is hired.
In some cases, the effect of a bad hire lasts well after they have left the company, as you have to spend time and money righting the organisation or department in the wake of their disruption. Diminished customer satisfaction, work quality and business reputation can also end up costing the company more money over the long term.
How do we measure the real and tangible costs of making a poor hiring decision?
There are many different formulas that HR professionals use to calculate the cost of recruiting, hiring, and retaining talent. Direct costs include recruiting and training, lost return-on-investment, and turnover costs. Some of the ways companies say that they have paid the price for a bad hire include:
- 41 percent confirmed they witnessed reduced worker productivity
- 36 percent experienced lowered employee morale
- 40 percent lost time having to hiring and training a new employee
- 36 percent said there was a negative impact on their clients
According to the US Department of Labour, the price of a bad hire is at least 30 percent of the employee's first-year earnings. The CEO of Zappos - Tony Hsieh - once estimated bad hires had cost his company ‘well over $100 million.’
In one example, an employee making $68,000 annually cost the company more than $800,000 when terminated within three years of hiring. And this does not include the cost of recruiting and hiring a replacement.
For a small company, this type of investment in the wrong person can be a real threat to the business. Given the pace of business today, smaller organisations are often prone to bad hires as they are more focused on day-to-day leadership and operations than on recruitment.
Many firms claim that bad hiring decisions were made when they had to recruit in a rush or under pressure, but according to chiefexecutive.net, in a study done by Glassdoor and the Brandon Hall Group, 69% of companies made a bad hiring decision as a result of flawed interview processes, with 22 percent reporting they had insufficient talent intelligence prior to recruiting.
How can we prevent bad hiring decisions?
It is clear that in order to reduce the risk of making a poor hiring decision, and enduring the subsequent cost, the focus should be on improving your pre-hire processes. While there is still a place for ‘gut feeling’ in the selection of new staff, you should back this up with robust recruitment strategies.
For example, a third party recruiter can handle screening and background checks, and your HR team should ensure that interview panels are robust and relevant. You absolutely must check references, test the employee in real work scenarios, and have a well thought out orientation process, with feedback sourced from all the staff who interact with the new hire. Getting feedback regularly, and early, is a great way to nip a bad hire in the bud.
You can position your company as a great place to work through an investment in, and commitment to, recruitment best practices. This will pay dividends for years to come and will save you valuable time and money in the long run.
Author of this article, Lara Quentrall-Thomas, is the Chairman of Regency Recruitment and Resources Ltd.