Article · 4 minute read
The Real Cost Of A Bad Hire And How To Avoid It
By Matthew Cauldwell– Senior Consultant – 12th October 2021
“The new normal”, “navigating out of the pandemic”, “the big return to work”. However you brand it, most businesses are looking to resume growth plans that were in place pre-pandemic. In the talent space, that means recruitment freezes are over.
The pressure is on for Talent Acquisition to hit recruitment targets and plug any gaps that may have been exacerbated by the pandemic. Despite this, the fundamental purpose of good recruitment – getting the right people into the right roles – has never been more important.
New research in this area has suggested three in four senior managers admit to having recruited the wrong candidate for a role and nearly two-thirds say the negative impact is more severe now than it was a year ago[1].
This could be attributed to the move to remote working and the effect this has had on hiring and onboarding practices; it takes longer to spot a bad performer and let them go.
It may also be down to Talent Acquisition shifting to entirely virtual recruitment practices, leading to more error-prone decisions as processes shift and change. Here at Saville we’ve even heard stories of some companies forgoing hitherto mandatory assessment practices – such as online testing – just to meet hiring demands more quickly!
But exactly how costly is a bad hire?
By a ‘bad hire’ we mean someone who leaves your organization shortly after they are hired, either having been performance-managed out or because they didn’t feel suited to the role.
Leading research in this area has estimated that the loss of an employee earning £25,000 per annum carries, on average, a negative financial impact of £30,614 [2]. Lose five such employees each year and you’re looking at a bill north of £150,000.
The higher the salary, the more complex the role and the longer it takes you to spot a bad performer, the bigger this cost will become. This becomes evident when you break down how this cost is calculated.
Opportunity loss cost
This is the cost of hiring a poor performer versus an optimal performer. This is largely comprised of the negative differential in individual productivity during the poor performer’s tenure. However, in severe cases this can also impact on wider team productivity, as team members may be required to give additional support or pick up the extra slack.
Administrative/logistical costs
This is the cost of performance-managing a poor performer out of your organization and hiring someone new. This includes the HR processes required to let someone go, any costs associated with advertising and sourcing a new pool of candidates for your new vacancy and the time-cost of HR and hiring managers running a new recruitment process.
Time lag to optimal performance
This is the cost of getting your new hire up to optimal performance. This usually takes at least a few months but for more complex roles it can be a year or more. The cost includes all of the onboarding, support and training that the new hire requires, not to mention the sub-optimal individual productivity during this time.
There is no perfect formula for calculating the exact cost of a bad hire but the above should at least give you some food for thought when it comes to estimating the cost of making hiring decision.
How can we reduce the costs?
The answer is simple. Reduce the number of bad hires you make. Prevention is the panacea. In the example above, if you only make one bad hire per year instead of five, this will save you over £120,000.
It is a game of risk management however; nobody can offer a silver bullet that guarantees you will never make a bad hire again, but there are certainly things you can do to reduce the probability of doing so. Extrapolate this over time and you make fewer bad hires, you reduce the cost.
So how do we manage the risk?
Ensure a high-validity recruitment process
Use methods of assessment that have a large body of research behind them, demonstrating they predict job performance.
When looking at the wider literature [3][4], absolute ‘must haves’ include:
- A relevant cognitive ability test, particularly for complex roles
- A well-constructed behavioral assessment that assesses competencies critical to the role
- A highly-structured interview that focuses on the attributes critical for job success
These methods are not only highly predictive but also – when used properly – will help mitigate human bias, which is one of the most common causes of incorrect hiring decisions and adverse impact. You won’t believe how many poor hiring decisions are made during a ‘chat over coffee’.
Don’t be rushed
Hiring demands can be immense but don’t cut corners in order to meet them. The cost of making the wrong decision is usually several factors higher than going a few more weeks without filling the post. If you’re really struggling, consider a temporary hire to fill the void. This is still likely to be less expensive than making a bad full-time hire.
Know what ‘good’ looks like
And, by virtue, what ‘bad’ looks like. If you have a clear idea of the attributes you’re looking for and can measure them well, you can spot a bad hire earlier. This could be earlier in the recruitment process or – for one of those unavoidable bad hires – earlier on in their tenure, allowing you to address the issue more swiftly.
Sources:
[1] Robert Half. (2021). The Higher Cost of a Bad Hire.
[2] Oxford Economics. (2014). The Cost of Brain Drain. Understanding the financial impact of staff turnover.
[3] Schmidt, F. L., Oh, I. S., & Shaffer, J. A. (2016). The Validity and Utility of Selection Methods in Personnel Psychology: Practical and Theoretical Implications of 100 Years of Research Findings. Fox School of Business Research Paper, 1-74.
[4] Saville, P., MacIver, R., Kurz, R., Hopton, T. (2008). Project Epsom: How Valid Is Your Questionnaire?
What can Saville Assessment do to help?
We’ve helped countless businesses of all shapes and sizes tighten up their recruitment processes with tried and trusted assessments. We partner with Talent Acquisition teams, empowering them with tools that vastly reduce the risk of a bad hire. We also bring expertise and experience in challenging your hiring managers to think twice about how they’re deciding who to hire and the potentially huge collective damage they are doing to your bottom line.
We know the do’s and don’ts of recruitment, and can help you address any issues arising from your current practices. Whatever you’re looking to achieve, be it better quality of hire, promoting diversity, equity & inclusion, reducing time to hire, providing a better candidate experience or reducing costly hiring mistakes, we have solutions that can help.
If you’d like to learn more, then please get in touch by clicking on the button below, emailing [email protected] or calling us on 020 8619 9000.