January 19, 2016

Hiring the right person is difficult. Its also costly. But what’s the alternative? What is the real cost of getting it wrong? The US Department of Labor, for example, estimates that the cost of a bad hiring decision can be 30% of the individual’s first years potential earnings. The amount is clearly hard to quantify but still far higher than what it would be if a company had hired right the first time.

When evaluating this issue, four powerful words come to mind for several reasons: exponential, systematic, variable and elusive. First, there are at least a dozen major direct and indirect cost categories to consider. Second, an employee can have wide reaching, multi-level impact or influence on an organization. Third, certain categories cannot easily be measured accurately in a numerical sense. And finally, the cost is contingent on variables such as the environment and position, among many others that may or may not be applicable; each with potentially dramatic effects.

Much of this challenges our ability to find any type of remotely precise general estimate.  This is not say a solid estimate cannot be formed but rather, there are several significant obstacles that cannot be avoided and there is only one approach to ensure reasonable accuracy: individualize each cost estimate through case by case analysis. Additionally, this analysis should review the following 12 major direct and indirect categories for applicability:

Direct Costs

  • Compensation – Salary or wages paid to employee relative to the level of work performed.
  • Benefits – Non-Cash compensation provided to employees.
  • Relocation Expenses – Costs to relocate or change the living conditions of the employees.
  • Hiring Costs – Resources used to recruit, assess, and on-board employees such as advertising, interviewing, and completing all necessary regulatory paperwork.
  • Training Costs – The time and money invested in providing the employees with information and skills to perform their job duties.
  • Legal Costs – Cost of legal liability or criminal behavior directly related to the employee’s actions such as theft or civil damages.
  • Unemployment Costs – Money required for employer to pay to employee following termination.

Indirect Costs

  • Opportunity Costs – Revenue lost from decreased productivity that can be due to inadequate performance, position vacancy, and resources expended by others to manage the employee and accomplish his/her tasks.
  • Reputation – Lost or damaged client/customer relationships and public perception likely caused by an employee’s poor performance or his/her statements after leaving the company.
  • Company Morale – Employee morale and confidence in the sustainability of the company can be negatively impacted by the actions of an employee, especially if this person is in a key position.
  • Company Culture –An organization culture determines behavior and the manner in which work is completed. These are the costs related to adverse changes in company culture due to a bad hire’s influence.
  • Attrition Costs – Costs from the turnover of employees other than the bad hire. For example, a bad hire can cause other employees to exit as a result of increased workloads or a loss of confidence in the company.

Final Remarks

A company’s talent is its lifeblood and in optimal circumstances, its greatest asset. And although it may not be easy quantify the costs of a bad hire, intuitively we know that there is the capacity in some cases to produce nothing short of stunningly terrible results.

So what’s the solution? Knowing the cost or risk remains important but producing a solid estimate relies on an individualized approach such as one position or department in the same company.  You can then use this information to invest in your hiring program at a level that fits the potential risk.

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