Bad Hires Cost 4X Salary: True or False?

Blog located in Hiring & Employment posted on November 13, 2017

Hiring a new employee is a challenging process. And making a wrong decision on a new hire is very costly for small business owners. As a top HR consulting firm in Toronto, we want to share just how costly a bad hire can be.  Let’s consider larger corporations for a minute. Bad hires have cost Zappos, the highly successful online retailer, well over $100 million[1] according to CEO Mark Zappos. So often bad hires are a result of business owners who are overly confident in their own HR skills, never took the time to develop questions to ask during an interview, or too rushed to follow a process for success – all of which can be alleviated by professional hr consulting.

The Shocking Truth

Performing the entire hiring process without a human resource consulting firm expertise or recruitment preparation is like saying, “I want to run the marathon because running is easy!”.  We all know running a marathon requires intense training and practice. So does recruitment. Salesforce, a cloud computing company, understands this. They have been able to maintain an aggressive growth strategy, in part thanks to their recruitment process.[2]. The company models the interview process on the Pareto Principle. Managers focus on hiring for cultural fit, and it really works for them!

The ability to hire successfully is the gateway to healthy business growth. Since people are the engine of business, the benefits of hiring right-fit are exponential.  This is why business owner must develop the right questions to ask during an interview and learn to weed out potential bad hires. But what happens when a company struggles with recruitment? They pay a high price for not developing a process and discipline around recruitment.  Many human resource consulting firms have said that one bad hire can cost as much as 4 times their salary.

The Painful Cost of a Bad Hire

If you are wondering how it can be so expensive, consider:

The lost salary for the Bad Hire:

Let’s say you decide to hire an employee at a yearly salary of $65,000. However after 6 months the employee was fired. You just lost $32,500 plus a half-year of headaches.

Firing Costs

The moment an employee is fired, you owe them notice obligation. It is a minimum of 2 weeks pay, or $2,500 after one year of employment.  If there are complications or other issues, then add in legal fees and you have easily doubled that amount, or $5,000.

Recruiting Costs

You incurred recruitment costs to source and hire that employee that ultimately did not work out. Either you paid a firm, or you team did the work of reviewing resumes, developing questions to ask during an interview, short-listing candidates, interviewing, drawing up the offer, all the back and forth, and doing reference checking. That cost was in the range of 20% of the annual salary, or $13,000.

Training Costs

Training costs for a new hire typically range around 20%, which would be an additional $13,000.

Team Costs

New hires take extra time on the part of their supervisor and team-mates. The amount of time and effort spent on a new hire, especially when things are not working out, all have an impact on overall productivity. What is the cost to your business of this lost productivity? It can quickly climb to over 100% of the bad hire’s salary, another $65,000.

Total Cost of a Bad Hire

A single bad hire rapidly escalates the costs to a company, far beyond the salary of that bad hire. Furthermore, those additional costs can climb to as much as four times salary, especially if action is not taken swiftly to exit that employee who is proving to be a poor fit. In light of this, the bad hire employee whose salary is $65,000 ends up costing the business well over $130,000! Imagine what your business could do with the cash flow freed up from this experience of bringing in a bad hire!

Human resource consultants are trained professionals, and they understand what steps need to be taken in the recruitment process to avoid these costly mistakes. For example, by having a dedicated recruitment script, proper questions to ask during an interview, and formal recruitment process, you can avoid the painful experience, along with associated costs – both hard costs and soft costs. So the upfront investment in bringing in an top HR consultant firm in Toronto sets you up with a bullet proof recruitment process and all of the essential tools for winning at hiring! Plus you – the business owner – can now invest greater resources and time into the growth of your business. Would you like to learn more about getting a customized HR Recruitment Process for your business?

Next week we continue this conversation. We are going to share the Number One Success Factor that every business owner needs to possess if they are going to attract the best possible people to work in their business! Can you guess what it is?  You may be surprised! Stay tuned.

References:   [1] http://www.businessinsider.com/tony-hsieh-making-the-right-hires-2010-10  [2] https://www.socialtalent.com/blog/recruitment/how-the-companies-that-everyone-wants-to-work-for-recruit-their-employees
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