All companies go through the usual cycle of employees coming and going over the years. Ultimately, you hope that they stay a few years before leaving and add value to the business along the way. But what about those times you have employed someone who ended up costing you money? Have you ever sat down and calculated what this ‘bad hire’ actually cost you in time and money?
I recently read an article about this very subject and found it fascinating so I started investigating actual statistics on the subject and boy, was I shocked. It was much worse than I imagined!
A mistake in the recruitment process which leads to an employee termination can cost an employer between half and two-thirds of an employee’s salary.
For example, an employee on a salary of $60,000 that leaves within the first 12 months of employment will cost you $33,000 or 55% of their salary.
Direct costs will include (advertising, selection process, formal training/induction, severance).
Indirect costs can be as much as $10,700 (interviewing time, informal training, productivity loss, mistakes, failures and missed business opportunities).
Other studies have suggested that the total cost of replacing a professionally-qualified employee may be as much as the equivalent of one year’s salary and for senior management employees it may be well over one year’s salary.
So how do you prevent these kinds of mistakes in your business? First of all, don’t hire out of urgency. I’ve heard too many clients say that a warm body is better than nobody. This makes me cringe as a bad hire is far worse than leaving a position vacant until you can find the right person.
Here are four more costs to consider when you hire in haste and finish up with a dud:
- The impact internally. Especially in a small business or business unit. If other employees have to cover mistakes, pick up the slack or put up with unprofessional work habits they will become resentful, morale will suffer and eventually these valuable employees will quit.
- The impact externally. In this day and age of social media, the impact of employees who have poor stakeholder communication skills can be immediate and very damaging. Your hard-won company reputation and brand goodwill can be quickly lost with an employee who is careless or thoughtless.
- Performance management. The time you will spend managing poor performance instead of coaching and developing other employees will be a distraction you can do without.
- Manager’s reputation. Everyone makes a bad hiring decision every now and again, however, if someone establishes a pattern of bad hiring then they get a reputation as a manager with poor judgement and guess who will be heading for the exit next?
Ultimately, the cost of a bad hire is significant. It can bring down a team, manager or an entire organisation. Whist there are no guarantees, taking the time to cast a wide net and doing your due diligence in selecting employees is well worth the effort and will minimise the chances of making a bad hire and maximise your likelihood of making a choice that pays off in the long term.