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How to determine the cost of a bad hire

07 Jun 13:00 by Mark Baker

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The cost of a bad hire relates to the fallout that occurs when mistakes are made in the recruitment process that results in the wrong person being given the job in question. 

Employing someone who fails to perform well is extremely costly for any business, particularly taking into account the serious financial implications, time wasted and the potential negative impact they may have on their peers.

In fact, according to accountant Accounts and Legal, the average employee costs UK SMEs £12,000 to replace. However, it would be fair to say that more senior members of staff will incur the highest turnover costs, due to the position they hold. Some studies, such as the Society for Human Resource Management, predict that every time a business replaces a salaried employee, it costs six to nine months’ salary on average. For a manager making £40,000 a year, that equates to £20,000 to £30,000 in recruiting fees, training expenses and lost productivity.

A Centre for American Progress study found average costs to replace an employee are:

  • 16 per cent of annual salary for high-turnover, low-paying jobs (earning under £30,000 a year). For example, the cost to replace a £10/hour retail employee would be £3,328.
  • 20 per cent of annual salary for midrange positions (earning £30,000 to £50,000 a year). For example, the cost to replace a £40,000 manager would be £8,000.
  • Up to 213 per cent of annual salary for highly educated executive positions. For example, the cost to replace a £100,000 CEO could be as much as £213,000.

In addition, a wrong hire can result in a skills shortage within a specific area of the business, subsequently placing undue pressure on other employees. This will inevitably impact on profit margins, cash flow, morale and company reputation.

This is evident following a survey of more than 6,000 hiring managers and HR professionals conducted earlier this year by CareerBuilder, which showed how costly recruitment errors can be. More than over 50 per cent of employers in each of the 10 largest economies in the world revealed they had felt the effects of a bad recruitment decision.

In the UK alone:

  • 62 per cent of employers reported a bad hire.
  • 27 per cent of companies said a bad hiring decision cost them over £50,000.
  • 23 per cent of employers reported a loss of productivity.
  • 22 per cent observed a negative effect on morale.
  • 16 per cent felt there was a negative effect on customer relations.
  • 12 per cent reported fewer sales.

In addition to the information above, the biggest and most difficult cost to quantify is that of time and that the entire recruitment process will need to be repeated. It is also worth clarifying what exactly is meant in the survey by “a bad recruitment decision”. In this case, it was deemed to be someone who turned out to be a bad fit for the job or did not perform well. This suggests that the bad recruitment hire was down to the candidate when, in fact, it is just as likely to be down to the company itself.

Making rash decisions and bringing in the wrong type of people can have a detrimental effect on company culture, which is why it pays to be thorough when evaluating candidates.

When a role needs to be filled in your organisation, it is vital to invest in a clear hiring framework that ensures you allocate the position to the candidate best suited to it. This will help to avoid hiring mistakes while harnessing the best talent.

Focus on Experience

Bring the focus on to the candidate, rather than the experience they have. While some positions may require certain technical skills or certifications, employers can connect with higher quality candidates by thinking more expansively about hiring. Transferable skills such as leadership, communication, resilience, and problem-solving are often far better predictors for success than work experience.

Provide Training

Consider training and onboarding as part of the recruitment process. Train the right candidate rather than hiring one who is experienced but wrong for the role. Even though many facets of a position require strong experience, companies should consider the value of a good training program.

Exercise Due Diligence

Take the time to thoroughly investigate every claim made in an applicant’s resume and cover letter. This includes conducting a detailed and comprehensive pre-employment screening. This includes a background check on the candidate in question, which can help to expose any lies or exaggerations that a bad applicant may use in a bid to bag the job.

Use a Recruiter

Employ the help of third-party recruiter for extra support and expertise and to minimise the risk of a bad hire. Firms that specialise in certain industries and candidates with particular skills or seeking specific roles in a company can streamline recruiting and hiring while providing top quality talent. By using third-party recruiters, companies that cannot afford to bear the full financial brunt that stems from their hiring needs can save thousands of pounds in costs and hundreds of hours of work that comes from sourcing and securing the perfect candidate.

Take the Time to Reflect

Once a bad hiring mistake has been resolved, use it as an opportunity to assess your recruitment process. Take the time to identify what went wrong and rethink the current process if mistakes have been highlighted. Pay attention to each and every stage of the recruitment process and whether any elements were overlooked if the time was spent wisely or any corners were cut. Finding what went wrong allows you to minimise the risk of the same thing happening again. The one positive that comes from making a bad hire is that it allows you to take a close look at your recruitment structure and put the right measures in place to avoid making the same mistakes in the future.