The Million Dollar Cost of a Bad Hire

The UK’s Recruitment & Employment Confederation has put a price on the cost of a bad hire. And it’s enough to make any recruiting manager wince.

“Perfect Match – Making the right hire and the cost of getting it wrong”, a newly published research report from REC, estimates that for an average middle manager role, the cost is more than three times the employee’s annual salary. And for more senior executives it becomes even more expensive.

REC presents the calculation for an individual earning £42,000. To put this into a mining context we’ve adjusted their figures to reflect the costs associated with a mid-tier COO working in Gold earning a conservative US$420,000.

Wasted salary $280,000
Wasted training $15,000
Recruiting and training new employee $100,000
Lost productivity of new employee $95,000
Lost productivity of the team $290,000
Staff turnover $540,000
TOTAL $1,320,000

There are, of course, several assumptions behind this. If no one leaves because of the bad hire, for instance, the staff turnover figure would be significantly lower.

When asked to identify the biggest costs, participants in the REC research named training and the negative impact on staff morale and performance as key factors. While it’s easy to put a figure on the former, the latter is more intangible and often dismissed by employers.

As one respondent says in the report, another hidden cost is the missed opportunity to hire the right person for the role; the best talent doesn’t tend to be available for long.

 

Does the research stack up?

As with any research, I always advise checking the source before taking it as gospel truth. And as REC is a trade body that represents the interests of executive search firms and recruiters, you’d be forgiven for taking an unhealthily large pinch of salt with these findings.

Certainly, the Department of Labor in the States make a more restrained estimate of 30% of the employee’s first-year earnings, though many experts have argued this only includes direct costs and ignores the collateral damage, including the impact on the employer brand.

At the other end of the scale, however, the Society for Human Resources Management (SHRM), found the costs could be more than five times the hire’s annual salary. Tony Hsieh, CEO of the online shoe retailer Zappos, once claimed that bad hires had cost his company more than $100million. And when Yahoo fired its COO, Henrique de Castro after 15 months, his severance package alone was US$58 million.

Against these figures, the estimates above seem conservative.

 

No organisation is immune

REC’s research also indicates that many organisations are fooling themselves about how much poor hiring decisions had cost their organisations. “Even at the highest management level,” say the authors, “33% of those who work in a business that has made a bad hire… believe that it had not cost them anything over the past year.”
Few employers are immune from making bad hiring decisions. The same report found that 85% of HR managers said they had worked in companies that had hired the wrong person for the job. Frankly, I suspect another ten per cent may not have been entirely honest.

Another report, by Leadership IQ, involved more than 5,000 hiring managers who had collectively hired more than 20,000 employees during the three-year study period. They found that 46% of new hires will fail in their first 18 months – an astonishing figure and potentially devastating to an organisation’s finances.

 

What causes bad hiring decisions?

Why are so many poor decisions made? REC’s extensive report lists several reasons, with the most common being:

  • Poor briefs with insufficient detail on cultural fit
  • Lack of diversity – repeatedly fishing from the same pond
  • Speed takes priority over quality
  • Lack of rigour in the interview process and reference checking
  • Too few stakeholders involved in the decision-making process
  • No tests of attitude or aptitude
  • Poor induction and onboarding
  • Making the same mistakes repeatedly

Stratum International’s TalentAssay methodology and platform were created to address challenges like these. The online platform makes the details of shortlisted candidates from all over the world available to multiple decision-makers wherever they are based. Shortlisted candidates go through a McQuaig® behavioural assessments and clients have the opportunity to specify competency-based questions for the video interviews candidates complete at home.

It all combines to create a service that enables us to achieve retention rates of 96% in year one and 93% in year 2, compared with the average of 46% found by Leadership IQ.
And when you consider the costs outlined in the REC report, that has to be an attractive proposition.

We’re so confident in TalentAssay™ it’s backed by an industry-leading replacement policy in the unlikely event that a hire doesn’t work out.

The Recruitment & Employment Confederation’s report, Perfect Match – Making the right hire and the cost of getting it wrong, is available from their online store at https://www.rec.uk.com/shop/research

Image (c) Shutterstock | thodonal88

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