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."
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