Recruiting poorly may cost more than you think, not just in financial terms either.
A few facts from the recent REC survey ‘Perfect Match’
85% of those surveyed admitted that their organisation had made at least one poor hire in the last 12 months
33% of managers believe that poor hiring, even at senior management, costs them nothing
20% of hiring managers admitted they have no idea how much a bad hire costs.
88% of business leaders admitted to allowing a ‘toxic worker’ to stay in the company too long.
27% Turnover of staff moving to different employers in the Financial and Insurance sectors from January 2017 to December 2018 (Office of National Statistics)
2 in 5 hires turn out to be bad hires within the first 18 months
So, what constitutes as a bad hire, and what are the tangible and intangible costs on the organisation?
A bad hire is simply the employing of a person who is not aligned with the corporate’s vision, culture, and business goals. In essence a bad hire can be termed as a liability that can turn in to a major stumbling block for the success of any organisation.
A question we often ask is “How many people that you employed in the last 12 to 24 months have you retained for 12 months or more?”
The response quite often is said with pride that they have a 75% or even 80% retention rate, almost as a badge of honour. Let’s turn that statement on its head - you are happy with a 20-25% failure.
In other words, 1 in every 4 or 5 hires is not going to work out and will incur an additional cost to the company.
How much does a bad hire cost an organisation and what are its component parts?
The cost of a poor hire is not just the recruitment cost to replace, that in fact is a minor cost of the totality.
A company hires a Manager (Employee A) on a salary of £42,000, provides an initial 4 weeks training and on-boarding. However, the employee fails to make the grade and is let go of/leaves 8 months later. The Company then runs a combined in-house/agency recruitment for the replacement, culminating in Employee B joining the company 5 months later and also receives 4 weeks initial onboarding and training.
Due to the initial bad hire the rest of the team (4 people) had to work overtime to cover the vacant position and also rectify the mistakes made by Employee A. Team resources were reallocated and procedures repeated. Staff morale took a dip and complaints raised due to disruption and increased workload, which in turn affected quality. Before Employee B had reached optimal productivity (normally 5 months in to role), Senior Team Member C left the company as a direct result of the problematic structure and work dynamics.
Cost calculations of a bad hire for this example company.
Employee A - Direct Costs
Wasted Monthly Salary 8 months £28,000
Training Provided External cost and management time £1,500
Employee B - Direct Costs
Agency Costs 15% of salary £6,300
In-House Recruitment Cost Placement of advert on-line £200
Time spent by senior management
directly dealing with recruitment
activities (2 staff combined salary
of £65,000) for 2 weeks. %of monthly earnings £2,500
Training Provided. External cost and management time £1,500
Lost productivity until reaching
optimal levels. (1st and 2nd months = 25% productivity,
3rd and 4th months = 50% productivity,
5th month = 75% productivity) £9,625
Total cost £20,125
Indirect Costs - team morale
Lost Productivity 5 Team members with average salary of £35,000 at an average of 80% productivity, for 10 months (5 months before Employee B Joined and 5 months until Employee B reached optimal productivity)
- £5,832 per team member £29,160
Staff Turnover Employee C on a £45,000 salary,
average 120% of annual earnings £54,000