The Cost of a Bad Hire

Posted by Lindsay Joseph on Jun 5, 2017 12:16:42 PM

Everyone wants to hire “A+” talent. They want a candidate who is going to hit every point in what can sometimes be a laundry list of technical skills on a job description. They want someone with a great personality and is the perfect cultural fit. Moreover, they want someone to stay with the company for the long run through the highs and lows.

 

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Companies want to hire candidates who will hang the moon and stars as efficiently and cost-effectively as possible. This often proves to be an unrealistic request. Instead, companies tend to have to choose netween acquiring top talent at a premium price or selecting another choice that fits their budgets. Typically, just like us consumers, they opt for the second one.

Organizations derive strategic value from their people which allows companies to stay ahead of the curve and outperform competitors in the marketplace. Human capital is just as important as technology and physical assets when it comes to value creation. Remember, people make the decisions behind how such resources are used. There can be work-arounds for not having the latest software or having a budget cut for the upcoming quarter or year. There’s no work-around for lacking the best talent.

The top performers drive revenues that typically equate to tens of thousands of dollars more than their average peers. These gaps can even be hundreds of thousands or even more between the best and the rest. So, skimping on your talent acquisition strategy can cost your company, especially when you don’t even hire an average performer. Sometimes, we hire bad candidates. Instead of adding to a firm's profitability, the cost of a bad hire affects organizations in many different ways such as:

 

 

1) Lower Performance 

The most obvious of these is lower performance, which leads to less productivity. Most companies are aware of what to expect from their top and average employees. They base their organizational predictions around what they will be able to produce. These predictions typically don’t account for the productivity of below-average performers. In a perfect world, organizations don’t have below-average performance. Often, they are reluctant to see that they do.

Lower performers may not have the combination of knowledge, skills, and abilities (KSAs) that enable them to complete their tasks at a quicker rate, with better quality execution, or a combination of both. They may have a large learning curve when it comes to completing new tasks or may lack the experience that prevents rookie mistakes. And they might just not have the grit and determination which give way to exceptional performance. Their lower performance ultimately results in less productivity and more mistakes. This can not only result in lower profitability but a loss in revenue altogether.

 

2) Lack of Engagement 

The issue with lower performers may not be one entirely about their ability to perform, but it may be an issue around their desire to perform. Employees are becoming increasingly distracted which means that not all of their time spent at work is spent working. Distractions are not the only problem; they just may be disenchanted by the company, their co-workers or boss, the work itself, and a number of factors.

These are issues that are becoming more prevalent for organizations at large. In fact, Gallup reported that only 13% of employees worldwide are engaged. Bad hires are those that allow their lack of engagement to prevent them from getting work done to the standard of quality it needs to be, in a timely fashion, or altogether. On the other hand, top talent will be able to execute in routines where they ensure they are engaged and are working within a steady flow. The issue is costly; Gallup also reported in another study that disengagement costs US firms up to $550 billion annually. 

 

 

3) Absenteeism 

Not coming to work, being late, or taking partial-days off is also costly for employers. The top two reasons for absenteeism are personal illness and family conflicts which are bound to happen. It's also important to note other reasons including personal needs, stress, and an entitlement mentality that employees just deserve to be able to take some time off from work. These are not issues of circumstance or happenstance, but intentional decisions made on the behalf of the employee to not come to work. 

That is a day of productivity loss which may result in other co-workers stretching themselves to handle their workload or employees getting overwhelmed when catching up. Taking time off of work when one is actually capable of going indicates lower levels of organizational commitment. This result could have been avoided in the initial screening process with the right questions or reference checks. According to Forbes, the average cost of absenteeism is $2,650 for salaried employees and $3,600 for hourly employees. Like disengagement, absenteeism costs US employees hundreds of billions of dollars each year and the most-costly source originates from below-average talent.

 

4) Turnover

When lower performance, lack of engagement, and absenteeism are issues, turnover becomes inevitable. This may be the result of voluntarily departures or termination on behalf of the employers. However, up to this point, the company has likely incurred some cost from the other factors. There are even more costs associated with turnover. This includes the lack of productivity from the role being vacant, the cost associated with searching for a new candidate, the opportunity cost of all those involved in the hiring process to be working on other things had they hired a better candidate the first time around, and any cost associated with on-boarding, training, and getting the candidate up to speed.

Depending what is involved in the process of replacing a candidate that didn’t last, ERE reports that the cost of turnover is anywhere from 30% up to 400% of the original hire’s first year salary. The takeaway: hiring the wrong person the first time is a big mistake, especially from smaller companies who are most sensitive to changes in their workforce. There is a limited number of “A-players” out there and not everyone can afford them.

The cost of screening for the best candidates can get very expensive. It's important to understand that making an investment in a good talent acquisition strategy saves you lots of revenue in the long-run. In addition, if you can be somewhat flexible, you’re better off spending slightly more on better talent than the alternative: hiring the wrong person due to cost restrictions. Ultimately, a bad candidate costs significantly more.

 

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Topics: Hiring, Leadership, Talent Acquistion