Article: The Cost of a Bad Hire

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The Cost of a Bad Hire

Hiring the wrong employee can quickly spiral down to a significant financial-hit, reduced productivity and cultural degradation- all big risks to the company's progress.
The Cost of a Bad Hire

Employers today are battling a real war, the “War for Talent”. They are going all out to grab the best resources they can. This means rejigging hiring processes and selection tools to help us make the right hiring decision. But what happens when despite investing millions in enhancing the hiring process, employers end up with employees who are not up to the mark? Here is a real impact of hiring the wrong employee, and how you can avoid the same. 

The Impact of a Bad Hire

A bad hire can be compared to a bad apple, one which is not only delivers on its own, but also a threat to spoiling others. The impact can be calculated in the following terms:

Quantitative i.e. Productivity Loss: A bad hire saps the organization’s resources by way of increased investment in training, coaching and mentoring, performance reviews and disciplinarian actions, and so on. Not to mention the actual cost of the hiring process itself – designing and administering tests and tools, time and effort of the hiring managers and HR, etc. Then there is the cost of the employee leaving and having to start all these processes all over again. 

All these costs add up to create a financial sink that drains resources and costs the company, creating a negative productivity impact.

39% of businesses report a decrease in productivity due to a bad hire- Global HR Research2

Qualitative i.e. Cultural Impact: When a bad hire creates a productivity lag, good employees need to bear the brunt of it, by making up for the productivity deficit. This often leads to widespread disengagement amongst high performers. Poor performers also lower the performance bar, and spread disengagement among team members. This impact extends even after the bad employee leaves, the organization has to invest in resetting the behaviours. 

How to Calculate the Cost of a Bad Hire

The unfortunate part is that despite knowing that a bad hire spells doom, companies continue to make the mistake of hiring the wrong people. According to a research3, 43% of respondents stated they got caught in the trap of a bad hire because they felt they needed to hire someone quickly. This is a common mistake, where urgency takes precedence over quality, HR needs to convince the business that it is worth the wait to get the right person on board. For this, HR must quantify the actual cost of a bad hire, and educate the business managers about the same, in their own language. Here is what to consider while doing this quantification. 

  1. Hiring Cost: Cost of assessments, screening, selection and other hiring processes like travel costs, technology costs etc. 
  2. Compensation: Salary given to a non-productive employee is as good as money poured down the drain. Research4 by the U.S. Department of Labour puts the price of a bad hire is at least 30 percent of the employee's first-year earnings.
  3. Maintenance: Benefits offered to the employee. 
  4. Severance: The cost of turnover in terms of exit formalities, severance packages and other pay-outs. 
  5. Opportunity costs: The costs that would have been saved, had a high-productive employee been hired in the first place. 
  6. Disruption costs: The spiralling impact on the overall team, which leads to disruption of culture and attitude. 


These are only some of the tangible and intangible costs that HR must take into consideration while making hiring decisions, and prevent hasty ones. 

What companies can do to prevent a bad hire

This high-risk situation puts a lot of pressure on HR to hire right the first time. The traditional screening-selection-interview process, often conducted manually by recruiters may no longer work. One of the biggest obstacles to hiring the right people is the inherent subjectivity in the selection process, ranging from psychological biases of the hiring manager to non-quantification of competencies. Some ways to overcome these hindrances are: 

Add objectivity to soft-skills evaluation: The way soft skills are evaluated can differ from one hiring manager to another. HR must add an element of objectivity by applying scientific talent assessment tools. For example, top scorers in Aon CoCubes’ assessment process are 3.5x more likely to be top performers. Such tools help break down ambiguous aspects like “cultural fit” into “desired, observed behaviours”. This helps employers know exactly what they are looking for, and get that. 

Define “pre-requisite” and “trainable” skills: When defining role-level competencies, make sure you outline two types of competencies for each role: 

  1. “Pre-requisite” competencies i.e. competencies that a candidate must have beforehand- a non-negotiable
  2. “Trainable competencies” which the employee can learn once hired, through onboarding, training etc. 

Making this distinction will help hiring managers meet a minimum threshold of candidate quality, reducing the chances of a bad hire. 

Define job descriptions correctly: Often, a bad hire is the outcome of a bad attitude, for example lack of team spirit, or non-commitment to company goals. HR must therefore, define the job description including elements such as “work on weekends”, and “liaison with different teams”, so as to set the right behavioural expectations at the outset. 

Above all, HR and Talent Acquisition (TA) professionals must become tech-savvy and apply scientific rigor and technology innovations to hiring processes, so as to make the right hiring decision. After all, high performers form the foundation of overall high organizational performance. Having the top talent on board results in great client ROI- 48% better customer service and 13% higher sales. And the power lies with HR and TA to drive these positive numbers through the right people.  

Sources: 
1 https://www.businessnewsdaily.com/9066-cost-of-bad-hire.html 
2 http://www.ghrr.com/the-real-costs-of-a-bad-hire-infographic/  
3https://www.shrm.org/resourcesandtools/hr-topics/employee-relations/pages/cost-of-bad-hires.aspx 
4https://www.forbes.com/sites/falonfatemi/2016/09/28/the-true-cost-of-a-bad-hire-its-more-than-you-think/#1be761254aa4 

Topics: TA Week, HiringScience, Recruitment

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