Three New Hires for the Price of One - The Real Cost of a Bad Hire

Three New Hires for the Price of One - The Real Cost of a Bad Hire

Updated: Apr 15

Company teams that work well together will create a company that has a  great culture, provides great services/products, stand out from the pack and will attract talent. 

Businesses need to make decisions every day and most of those decisions involve time and money. Questions and strategies are constantly being evaluated, such as:

  • How are we going to service our client or customer and create a sustainable relationship?

  • How are we going to service them so they tell others about us?

  • How are we going to design the best product or service?

  • How are we going to create the most valuable product or service so we win over our competitors?

Of course the biggest question is what resources are needed to accomplish our goals, specifically what type of human resources will assist the company to continue to grow?

With so many tasks to complete day to day, hiring can be a chore. When a company needs to hire, a hiring manager needs to fit the time into his or her schedule to:

  • Determine what the finalist candidate should look like

  • Review or write the position description

  • Review resumes

  • Determine who should be interviewed

  • Schedule interviews

  • Be involved in on-boarding

This process takes 40 plus hours of just the hiring managers time, on the hiring process for one hire. The time spent up front in this process can save much more money and it can save time; making sure the right person is hired.

A recruitment process is pretty typical when a company has a job opening or requisition. The following usually take place:

  • A posting is placed and potential candidates submit their resume.

  • The resumes are most likely reviewed through an applicant tracking system and the candidates who align with the job description are pulled from the people who have applied.

  • Five, ten, fifteen people are interviewed and the company picks the best candidate.

  • Potentially, an employee refers someone who they really want to be hired, which may result in a reward of an employee referral fee if the candidate is hired. The nice thing here is that the "referee" has done a bit of selling, sharing information about the company and culture to the candidate.  

  • Candidates are interviewed until a favorable candidate is identified and offered a position.

An alternative process may be to have a firm work on the position to free up the hiring team's time while recruitment strategy is taking place. In this case:

  • A company may partner with a recruitment or talent acquisition firm, who will engage with the market and candidates to identify candidates that typically are not aware of or looking at postings. Typically, outside search firms work from a retained or contingent approach.

  • Job descriptions are written or refined.

  • An analysis of talent is done to map candidates that align with the position.

  • Individuals are vetted and a slate of candidates are presented.

  • The individuals are interviewed and a finalist candidate is presented an offer.

  • Guarantees are offered by these firms or agencies helping the hiring team to feel confident they have the right team member or the firm will replace the candidate.

In some cases the employee works out and in others it is clear the person hired is not right for the job. What happens if an employee does not work out?

It is time to fire someone and hire someone else. This unfortunately creates a larger cost associated with hiring someone new. The overall costs are hiring costs, training costs, total compensation, cost of maintaining an employee, cost of disruptions, severance costs and possible missed business opportunity costs. Unfortunately, the company has to pay for hiring costs and training costs all over again and has to add time to maintain current employees while they suffer the loss as well.

What is the real cost of a "bad" hire?

Employee turnover costs vary. Studies by many different human resources and management associations report a range between 50 percent and 250 percent of annual salary per exiting employee. Check out our attrition calculator. Of course, entry-level positions differ from executive, management and sales positions (which are at the higher end of cost). According to the U.S. Bureau of Labor Statistics, the average monthly turnover rate is 3.0 percent for a company (this does include any separation statistics, but it does include resignations, retirements, layoffs and discharges). The number of layoffs and discharges as of December 2014 was 1.2% and for resignations 2%. 

To put this in perspective we will use the median personal income of full-time workers of approximately $41,123 per year (according to the US Department of Labor Bureau Labor Statistic for 2014):

  • Assuming 100 percent of salary as turnover cost (less than median of the range above), for a company with 100 employees with an average of 1.2% discharge per month that would equate to an approximate annual cost of $592,171 and for 1,000 employees $5.9 million. 

  • Now consider the 100 person company that discharges 2 employees for the year compensated at $100,000 salary with the rest of the yearly turnover at the median income level; the annual cost would be $693,476.

  • For a 1,000 person company losing one employee at $100,000 per month and the rest of the yearly turnover at the median income level would cost $6.6 million.

This is just a portion of the annual costs and does not include the additional 2% that quit or retire (the examples below only include median income numbers and would be higher if professional salaries were included in this equation):

  • At 3% of total turnover a 100 person company would have an annual cost of $1.5 million.

  • At 3% of total turnover a 1,000 employee company would have an annual cost of $15 million.

There are still additional costs!  One other expense is the approximate cost per day of lost productivity. The best way to figure this number is to determine the gross income of each employee (revenue minus the cost of sales per employee) minus the employee's salary and benefits.

An executive will have more impact and loss of productivity versus an entry-level employee. In addition, there are exit costs like human resources' time. There will be cost for the manager's time to do an exit interview, review the employee's work in progress and how to cover the work while the position is vacant.

If the employee was terminated there will be severance costs. There are loss of contact costs and loss of knowledge costs (including training costs). There will be loss of productivity either through the loss of the employee or the fact that the other employees cannot do their own job fully while taking on the other responsibilities. There may also be overtime costs.

There are also possible disruption costs (for example a customer who does not receive what they expected, because things were not handed off properly). There will also be recruitment costs as outlined earlier in this article.

So why is this important to a hiring manager? These costs hit the hiring manager's bottom line and a hiring manager can only do so much in a day, making his or her team critical to the business success and their own success. Making sure a good recruitment plan is in place will assist a hiring manager to be successful. It will cost time and money to put a strong recruitment plan in place; however, this cost will have a positive impact and will ultimately cost less than a bad hire.

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