This article was updated on June 18, 2018.
The cost of a bad hire can be quite high and is often more than organizations realize. Finance leaders can help their organizations understand and quantify the cost of a bad hire to use as a benchmark for optimizing their talent management and recruitment strategies. Knowing these costs can help HR managers more effectively analyze their recruitment investments and make better hiring decisions.
A Bad Hire Is Expensive in More Ways Than One
New hires that are unproductive, unqualified or prone to complex interpersonal dynamics can hurt and cost an organization in many ways. Despite HR's efforts, it's not always possible to screen out every single one of these candidates. Applicants can lie about their qualifications, have poor attitudes that hiring managers don't recognize or simply fail to mesh with co-workers or policies once on the job. These employees not only drag down their own roles, but can also impact productivity and the morale of other workers.
According to Robert Half, the wrong candidate can not only create losses on their own, but can also add expenses and hassle for their dismissal and replacement. Employers should consider things like lost productivity, the need for additional supervision, diminished revenues and damaged client relationships. CareerBuilder reports that 75 percent of employers have hired the wrong person for a position, and one bad hire costs organizations an average of $17,000.
Use Measured Costs to Guide HR Investment and Strategy
Finance leaders should consider partnering with HR to help measure these costs to improve efficiencies. Calculating these costs can offer HR managers better benchmarks to use when evaluating strategies and making hiring decisions. Entrepreneur reports that these costs can throw productivity and budget out of alignment.
Employers should consider using tracking things like the additional onboarding expenses and salary of the new employee, average number of days to fill the position, hours spent reviewing candidates and holding interviews, the cost of advertisements, drug screening and days spent training the new employee. Recognizing the high cost can spur HR managers into guiding more strategic and effective recruiting initiatives. "In the long run, it's more difficult for the manager and team to accommodate a poor performer than it is to invest in recruiting quality candidates," notes Robert Half.
Reduce the Risk of a Bad Hire
While it may be tempting to hire quickly and settle for any candidate when positions are unfilled, hiring the wrong candidate could be worse than no candidate at all. Employers can reduce their risk of bad hires by more clearly stating job expectations, testing candidates for soft skills and engaging in extensive background checks. This includes not only criminal background checks, but comprehensive background checks on education and employment history. To get a better grasp of soft skills, HR should strive for a more conversational tone with candidates during interviews to get a better read on intangible skills like communication, leadership, critical thinking and willingness and ability to collaborate.
These skills can be tough to identify on a resume and don't always correlate with a high level of experience or education. Employers should also be as specific as possible about their needs for a position with detailed job descriptions that list skills and experience required. They should also pay close attention to performance in the first few months. This includes asking other employees to determine as early as possible whether a new employee is a good fit.
HR and finance can work together to calculate the full cost of a bad hire. Knowing this number, and understanding how it can impact the organization, can help drive more informed strategies and investments.