The Cost of a Bad Hire… Do You Want to Pay the Price?
One of the top three challenges that almost all businesses face in today’s business world is finding the right people to employ.
The national unemployment rate as of February 2019 was at 3.8%. This is compared to February 2018 at 4.1% and February 2017 at 4.7%. As the unemployment rate drops, the number of qualified individuals available in the marketplace drops, making it harder and harder to find the right people for the right job.
Jim Collins, the author of Good to Great, says, “get the right people on the bus, the wrong people off the bus, and put them in the right seats. They will sort out how to drive the bus.” A best practice for employers is to “hire slow, fire fast, and hire right… the first time!”
In a recent survey of small and medium-sized businesses, it was found that only 5% of businesses feel that they have “Best in Class” processes in place to hire effectively and efficiently. It was found that too many organizations make crucial hiring decisions based on “impressions” (background, resume, interview) rather than on “data.”
A bad hire or even a mediocre hire has significant costs for a business. These can include:
- Low productivity and performance
- Frustration and low morale
- Costly management cycles to redirect employees
- Poor reputation as staff turnover increases
- Negative impacts on client relations
- Costs to recruit and train new workers
Well-known recruiter, Jörgen Sundberg puts the cost of onboarding a high-level employee at $240,000. The U.S. Department of Labor puts the price of a bad hire at 30% of the employee’s first-year’s earnings, and further suggests that the cost to replace an employee can range from ½ to 2 times their annual salary.
For small companies, an investment in the wrong person is a threat to business success, culture and morale, internal and external disruption, focus, time, and resources, and can cause significant stress within the organization.
The true cost of a bad hire of a $100,000-salary employee can be as high as $240,000 when considering all of the relevant factors:
24% Salary, Healthcare, and Benefits
23% Severance and Unemployment
21% Workload Increase During Vacancy
10% Orientation and Training
10% Recruiter Fee for the Initial Hire
8% Recruiter Fee for a New Hire
4% Interview Time – Internal Employers
In an article written by Briana Morgaine for Bplans, she offers “13 Ways to Ensure You Always Hire the Right Person.” I have added the 14th: “Don’t judge a book by its cover.”
- Understand how the candidate’s aspirations fit the job.
- Vet them appropriately.
- Don’t hyper-focus on their past.
- Consider evaluation strategies beyond the face-to-face interview.
- Have candidates spend plenty of time with the team.
- Pay attention to the questions they ask.
- Work with them first.
- Prioritize culture fit — and a clear understanding of the company culture.
- Ask them what they’re not good at.
- Hire someone you could work for if the roles were reversed.
- Take your time.
- Be crystal clear about expectations (KPI’s).
- Trust your instincts.
- Don’t judge a book by its cover.
The most successful hire comes from a combination of “subjective” and “objective” employment selection processes. 2/3rd of the process is subjective and includes the review of resumes, interviews, and background checks. 1/3rd of the process is objective and includes the use of personality assessments, such as Everything DiSC, and job fit behaviors assessments, such as PXT Select. For the minimal cost of less than $500 for these assessments at this stage of candidate selection, a company can save hundreds of thousands of direct and indirect costs to their business from a bad hire.
In today’s business climate, when margins are low and there is a small market of qualified employees available, businesses do not have the luxury to make bad decisions. Businesses need to put the best practices in place to ensure that the right people are in the right seats on the right bus!