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The Real Cost of a Bad Hire

Red Adair, the renowned oil fighter who rose to prominence in the ‘50s

and ‘60s once stated, “If you think it’s expensive to hire a

professional to do the job, wait until you hire an amateur.” Although

this quote comes from a time and profession far removed from those in

which we operate today, the message may hold more truth now than ever

before.

With technology rapidly evolving and consumer demands constantly

shifting, it seems the only way that organizations can stay ahead of the

curve is to have the best people on their team. For this reason, in the

modern era of business, there has been a heavy emphasis placed on hiring

the top talent. For evidence of this, just look to Apple’s secret for

success:

“The secret of my success is that we have gone to exceptional lengths

to hire the best people in the world.”

-Steve Jobs

Unfortunately, as companies race to recruit the best talent, it appears

that few organizations are equipped to do so. Based on a study from PwC,

61% of CEOs have yet to take any action to revise their recruitment

strategies,

despite 93% of those same CEOs acknowledging the need to do so. This

lack of preparation is having profound consequences on organizations.

According to a survey conducted by Glassdoor and Brandon Hall Group,

95% of employers suffer from a bad hire every

year.

However, what is the true cost of these bad hires? Recent research is

beginning to provide the answers to this question and the numbers are

startling.

Dr. Gray Kustis, who co-hosted our Bootcamp, How to Hire a Successful

Recruiter,

has spent decades as a management consultant helping leadership build

out effective recruitment programs. Through his research and experience,

Dr. Kustis found that bad hires lead to 80% of employee turnover and

cost 2-3 times the salary level of the position that they were hired

for. Although this may sound like an exaggeration, when you factor in

the direct and indirect costs of a bad hire, Dr. Kustis’ numbers

actually seems fairly conservative.

Direct Costs of a Bad Hire

According to Dr. Kustis, the direct costs of a bad hire include

recruitment, interviewing, training, bonuses, and severance. Beyond

these costs, organizations must also consider losses on wasted

salary,

tax withholdings, and unemployment. According to employers surveyed in a

Careerbuilder study, the direct cost of a bad

hire

broke down as follows:

* 41% of of organizations reported that a bad hire cost them more than

$25,000

* 24% of of organizations reported that a bad hire cost them more than

$50,000

Indirect Costs of a Bad Hire: The Ripple Effect

Clearly, there are direct costs that can be immediately associated with

bad hires. However, what about the ripple effects resulting from the

“indirect costs” of a bad hire? Dr. Kustis believes it is these costs

(which include losses in employee morale, job knowledge, customer

satisfaction, work quality, reputation, and productivity), which bring

the most harm to organizations.

Causes of the Ripple Effect

So what causes a bad hire to have such a large ripple effect throughout

an organization? To start, hiring a new employee is collaborative work.

Often times, an entire team will be involved process, from recruiters

and hiring managers, to executives and other team members. As a result

of this, when a bad hire occurs, the wasted time and resources are

multiplied across these various departments and employees, compounding

the effects.

Beyond this, hiring someone is not a one time transaction. The actions

taken leading up to hiring a new employee–screening, interviewing, and

so forth–they only make up the tip of the iceberg. The real input of

time and resources happens once a new employee joins the team. From

initial onboarding and training, to continual guidance and work reviews,

employers must invest substantially in their employees to promote their

professional development (leaders in the industry estimate this cost to

be around $240,000 per

employee).

With a bad hire, this significant investment is completely wasted.

Lastly, compounding on top of the wasted time and resources, it is

inevitable that a bad hire will not carry their weight. As a result of

this, the rest of the team will have to take on additional work. Greg

Scileppi,

President of international staffing operations at Robert Half, addresses

this point by explaining, “Hiring a bad fit or someone who lacks the

skills needed to perform well has the potential to leave good employees

with the burden of damage control, whether it be extra work or redoing

work that wasn’t completed correctly the first time.”

Fallout of the Ripple Effect

When you account for these massive indirect costs, coupled with the

already substantial direct costs discussed previously, the magnitude of

the consequences stemming from a bad hire becomes clear. Two areas that

appear to be most heavily impacted by these consequences are

organizational productivity and employee morale. Based on a report by

CareerBuilder, 39% of employers identify a loss in productivity as the

number one cost of a bad

hire,

with 33% identifying lowered employee morale as the number one cost.

Robert Half found similar results

in their survey:

* Supervisors spent 17% of their time, or about one day a week,

managing bad hires

* 39% of CFO’s reported that bad hires cost them in productivity

* 95% reported that a bad hire affects team morale, with 35% saying

that it is greatly affected

Leading Reasons for Making a “Bad Hire”

If bad hires are so costly for organizations, then why do they persist?

CareerBuilder carried out a study to find the answer, uncovering the

following leading reasons for a bad

hire:

* Needed to fill the job quickly – 43 percent

* Insufficient talent intelligence – 22 percent

* Sourcing techniques need to be adjusted per open position – 13

percent

* Fewer recruiters due to the recession has made it difficult to go

through applications – 10 percent

* Didn’t check references – 9 percent

* Lack of strong employment brand – 8 percent

A separate report from Glassdoor and Brandon Hall

Group

found that:

* 69% of employers that made a bad hire identified a broken interview

process as the cause

* Companies lacking an established interview process are five times

more likely to make a bad hire

To Avoid Bad Hires, You Must Hire the Right Recruiters

Based on the stats discussed above, we now have a fairly clear picture

of how costly just one bad hire can be. But what happens if that one bad

hire ends up leading to significantly more bad hires. You know the

saying, “one bad apple spoils the whole bunch?” This is the case when

you hire the wrong people to manage your recruiting efforts, and the

fallout of this can be disastrous.

Just imagine the direct and indirect costs discussed above, compounded

for each subsequent poor hire made by one “bad hire.” Tony Hsieh,

experienced this problem first hand at Zappos. In this interview, he

discusses the consequences stemming from bad

hires at

his organization, which led to further bad hires and ultimately cost

Zappos over $100 million!

For this reason, as an employer, it is essential that you hire the right

recruiters to ensure that you have effective talent acquisition process

in place. This sounds easy enough right? Actually, not so fast. Remember

that recruiters have spent their whole careers playing this game. Most

likely, they will be working you as much as you will be working them

during the interview process. As a result of this, recruiter candidates

are always the most difficult to assess and effectively doing so is

somewhat of an artform. Fortunately for you, here at Newton, we have

spent decades perfecting this art, and we are happy to share our secrets

and insights with you!

Watch a Recording of Newton’s Bootcamp, “How to Hire a Successful Recruiter”

Unsure of where to start when evaluating candidates for your next

recruiting position? Watch Newton’s recent Bootcamp, How to Hire a

Successful

Recruiter

with Newton co-founder and recruiting expert, Joel Passen and Industrial

Psychologist and Management Consultant, Dr. Gary Kustis. Dr. Kustis has

decades of experience advising organizations on their recruitment

processes, so this is a session that you won’t want to miss!

In the “How to Hire a Successful Recruiter” Bootcamp, Dr. Kustis and

Joel will provide you with their deepest insights to creating a

comprehensive and scalable recruitment strategy. From the session,

expect to learn the following:

* Top qualities to look for in a successful recruiter

* How to develop a recruiter interview guide with specific interview

questions

* How to build out assessments to evaluate your candidates

Watch the “How to Hire a Successful Recruiter” bootcamp

here.


Guest

Post by Danny Madigan, Marketing Associate