The Real Cost of a Poor Hire

Think about the last few hires that didn’t work out.  On paper, applicants may possess the education, work experience and skills for the job, but polished resumes may not reveal hidden liabilities.  The real cost of a poor hire is often lost production time, money, and a decrease in employee morale – all costly mistakes for any employer.

“Your profits are walking out the door — literally. Every time you lose an employee, all the money you have invested in that employee walks out the door at the same time.” – Richard Galbreath, SHRM White Paper, 2002

Hiring an employee who performs poorly costs your company more than you may think.

The cost of hiring a new employee can be significant.  The Telecom Training Group reported that within the first six months of employment, a company will spend $5,000 to $50,000 on every new employee.  These figures add up quickly if many of your new employees coming on board don’t work out. A poor hiring decision leading to a replacement hiring costs approximately $14,000 for an employee with a high school diploma and $66,000 for an employee with a college degree.[1]

Key cost factors:

  • Cost to advertise
  • Cost of recruiting
  • Salary or unrecoverable draw
  • Insurance and benefits
  • Employer tax contribution
  • Cost of training programs

And, if the wrong people are hired, what is the cost of:

  • Lost sales?
  • Missed opportunities?
  • Dissatisfied customers?
  • Low employee morale
  • Re-starting the hiring process?

Harvard Business School has identified that the cost of poor selection for a sales representative is three times the representative’s annualized compensation, including expenses, training, benefits, wages and commissions/bonus.  Therefore, a $60,000 per year salaried/commissioned sales rep hiring mistake actually costs the company more than $180,000.  How many products or services does your company have to sell to make that $180,000?

The Importance of Job Analysis
One key reason for a poor hiring decision is an outdated job description.  Many job descriptions are not revised to reflect the new competencies and skills necessary to perform the work.  It is near impossible for interviewers to properly evaluate candidates without accurate criteria.  Careful, regular job analysis ensures that interviewers are assessing applicants based on the core competencies, knowledge, skills and abilities deemed absolutely necessary for the job.

Hiring solely on skills is not a wise move either.  Employers should consider how a prospective employee will fit in the organization, in addition to whether or not the person can perform the job duties.  Have you ever hired someone with outstanding prior performance, only to see him struggle at your company because his peers didn’t “click” with him?

Employees currently performing a job are the best people to consult when conducting job analysis.  They know what their everyday functions are and what it takes to achieve high performance.  Even better, have the current employees interview the new hires.  Few people will be more selective or discerning than the employee who has to directly rely on that new hire.  Current employees can also assess whether a candidate will fit into the culture of the workplace.  If you do use exiting staff to interview, make sure they know what competencies to look for, what questions they should ask and, of course, what questions are prohibited.  These processes take some time to correctly complete but in the end, you’ll be less likely to make a hiring mistake – and have to spend more time starting the whole recruiting process over again.

Employer Liability
Without a proper selection and screening process in place, employers and business owners are also faced with the risk of hiring a person who may pose a legitimate threat or risk to the safety and security of the company.  In one case, a church was sued on the premise of negligent hiring when the supervisor of a day care assaulted a child at the day care.  The court found the church liable because they had failed to uncover supervisor’s prior criminal conviction for the assault of a young girl and had hired him for a job involving contact with children.

Negligent hiring is a term used by the courts when an employer hires an individual without conducting a proper investigation of that person’s history, and later it’s discovered that the employee’s background contains something that would indicate a propensity for misconduct on the job.

Make Your Selections Carefully
Hiring qualified employees requires a major investment of both time and corporate resources. Many employers are starting to consistently use pre-employment background checks in order to minimize the risk of negligent hiring claims, to maintain a safe and secure workplace, and to protect company assets against the cost of a poor hire.  What are your company’s hiring and screening policies?  Are they designed to select the top performing candidate?

[1] Workplace Resource Learning Center

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