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What is the cost of making a bad hire?
Everybody makes mistakes, and when it comes to hiring staff, employers are at risk of making one of the costliest mistakes in business - the wrong hire. Do you really know what the cost of a bad hire is though? No?
In all honesty, working out the expense of recruiting errors isn't an exact science and a simple Google search will throw back all kinds of figures. The type of company, position being filled and the method of hiring can all affect the potential budget, but we've identified the main costs that employers stand to pay.
The different types of recruitment costs
When looking into the cost of a bad hire, we have to acknowledge that there are two ways that this can be measured.
First of all, there are the obvious financial implications. Recruiting staff, good or bad, will always come at a price and these mainly come in the form of:
1. Resources used to recruit (agencies, job ads etc.).
2. Time taken up of managers and / or HR staff.
3. Drop in productivity.
Of course, the direct cost of recruiting will be similar regardless of candidate quality, however it's the repetition of this process (when you don't get the right person first time) that can add up.
Secondly, there's the wider impact that the wrong employee can have on the business. It's difficult to determine how a new recruit will affect the company, but even the right appointment will cause some disturbance.
Whether it's the company morale or the quality of your service that's affected, you'll likely experience a few teething problems in the beginning. It's when these teething problems continue that employers may have to take action. Do you persevere and hope that your candidate eventually comes good? Or do you cut your losses and re-recruit?
Whichever avenue you take, you're already down the rabbit hole of poor recruitment costs - both financially and operationally.
How costly is the recruitment process?
The cost per hire will vary from company to company. Like snowflakes, no two recruitment campaigns are identical - even if you're recruiting for the same role, just six months apart.
How much a firm will be required to spend on talent acquisition will be influenced by a number of factors. The cost is impacted by both the vacancy in question and how many steps you incorporate into the process.
The chart above shows a breakdown of where the biggest costs of recruitment are likely to come from, according to Oxford Economics.
While they surmise that bringing in temporary cover is the greatest cost of recruiting (although this won't always be necessary), agency fees, job postings and just the time of others are all going to create a strain on the purse strings.
Can we really put a figure on recruiting?
Well yes and no.
In 2012, research by Bersin & Associates (now Bersin by Deloitte) showed that the average UK spend per hire was £5,331. This is supported by Oxford Economics, whose study suggested that the logistical cost of recruitment was £5,443.
So it looks like we can use £5,000 as a ballpark for hiring, but there are multiple components of the process that can budge this number up or down.
Factors that determine spend per hire:
- Time taken from advert to hire.
- Vacancy type (c-suite jobs are more expensive to recruit for than entry-level).
- Recruitment agency fees.
- Is it a newly created position or is temp cover needed?
The price of temporary workers
With research suggesting that the average time of hire is nearly 28 days, employers may have to bring in temporary staff to make up the numbers. Having a well thought out recruitment process will minimise any disruption, but temp appointments may be necessary in some instances.
Drafting in employees on temporary contracts, albeit a lesser financial commitment than a full-time employee, can still add to the significant costs of a bad hire.
Again, according to Oxford Economics, hiring a temporary worker while searching for a permanent solution can cost £3,618. Seems high, right? But if we consider that the average weekly pay for four weeks' work is £1,509, we've nearly made up half of that figure.
Add to this the the cost of hiring and the acceptance that the temp is unlikely to reach 100% productivity during their brief spell, and you have a fairly expensive hire.
How a bad hire affects productivity
It's generally accepted that a new appointment won't hit the ground running, but this period of 'getting up-to-speed' is one of the biggest hidden costs of the whole recruitment process.
Unsurprisingly, the difficulty in establishing a figure is one of the main reasons that this cost goes undetected, however it has been suggested that lost productivity could cost upwards of £25,000.
The cost of making new hires 100% effective
Admittedly, as employees and professions differ, the path to optimum output can vary. In an article by William G. Bliss, it was estimated that it takes around five months for a new hire to reach full productivity and he has broken this down into three time periods.
At each period, we can see how productive an employee is deemed to be, and therefore how much pay is wasted on lost productivity.
Taking into account both Bliss' productivity scale and the average weekly earnings (before deductions) in the UK, employers could stand to lose more than £4,500 in pay - just in the first five months of an employee's tenure.
If the candidate doesn't possess the right skills or knowledge for the job, we can assume that the timeframe to get them to full productivity would be extended (if indeed they ever get there).
Now imagine that you went through all of this time and expense, only to have to go back to the recruitment drawing board and bring in somebody else? That £4,500 suddenly becomes £9,000.
How does a bad hire impact the productivity of staff?
It's not just the lost productivity of the new starter that can be costly. When anyone joins a company, a certain level of handholding and helicopter supervision is expected in the early days.
Whether a manager takes on this responsibility themselves or leaves it to a trusted employee, someone's time is being sacrificed in order to help the newbie settle in.
Employers, therefore, can expect the overall productivity of the business to dip slightly in the first week of a new hire. The problem occurs when this period is extended over many weeks or months. A short-term fall in output can be justified when it aids the future output of a new employee, but this doesn't quite work if that employee never reaches their expected level.
Will recruiting the wrong staff impact morale?
Guess what? Life isn't all about money and there are costs of a bad hire that can't quite be measured in pennies and pounds. As an employer, it's important to look beyond the balance sheet and acknowledge the wider negative impact that can be caused by poor recruitment.
Company morale is often delicately balanced and it only takes a slight change in office chemistry to tilt the equilibrium. Adding a new member of staff to an already carefully crafted workforce can have this effect and damage the atmosphere on the office floor.
While it shouldn't take too long for a bad hire to prove themselves as exactly that, it's usually their colleagues that realise the unsuitably of the candidate first. Whether they explicitly state it or not, staff won't appreciate picking up the slack for a poor performer, nor will they welcome being considered as 'equal' to someone who clearly isn't up to the same standards.
A Robert Half survey, which included 2,100 Chief Financial Officers, found that one of the biggest concerns of hiring is how it would affect workplace morale. 39% stated that this was their main worry, with 95% of respondents confirming that a poor hire will have at least some bearing on morale.
What does this drop in morale mean for the employer, though?
Lower levels of morale can:
- Damage productivity
- Make it harder to attract top candidates
- Decrease staff retention
- Increase absenteeism
- Hurt the quality of customer service
Worried about company morale? Read about three ways to boost and maintain morale at work.
A bad hire reflects poorly on the management
Have no doubts, when someone new joins a company, existing staff will be quick to judge.
Unfortunately for the employers, it's not just the office newbie that's being assessed though, as the new recruit is generally seen as a reflection of those who appointed them.
As a result, a bad hire can hurt employee relations and do great damage to the credibility of those at the top. Staff trust the key decision makers in the business to bring in candidates who are going to add value to the firm. Failing to do this, however, can lead to negative opinions and murmurs of discontent.
Okay, so there's unlikely to be a mutiny, but consistently making bad recruitment decisions can start to grate on the loyal team you've already assembled.
Effects of poor recruitment on customer relations
While you're busy counting the pennies, it's easy to forget who stands to suffer most from a bad hiring decision - the customer. Of course, team chemistry is important in the success of any business, but all of this pales into insignificance if you're delivering a poor service.
How much a wrong hire will hurt customer relations will be down to the position. If the candidate is being employed in a customer-facing role, then damage can very soon be done to the reputation of the business. In fact, this adds another dimension to the recruitment process as employers need to find candidates with 'people skills'.
Conversely, if the job is away from the public gaze, wrongly skilled staff can still indirectly contribute to poor relations as they become a spanner in your well oiled machine. All of this can then become costly, as the business becomes both less efficient and less attractive to customers and clients.
The relationship between bad hires and sales
So far, we've determined that taking on the wrong staff can hurt morale, customer relations and productivity; but what about sales?
While bad hires will inevitably create a hole in the company wallet, what happens if there is less money to top up the reserves?
A global study by CareerBuilder, showed that between 9% and 25% of employers believe that fewer sales can come as a direct result of recruiting the wrong candidate.
As we can see, 12% of UK employers surveyed believe that poor recruitment leads to fewer sales, with just under a quarter of China based employers reporting the same.
Now I know what you're thinking, 12 employers out of every 100 doesn't seem that high, right? Well, if we were to apply this figure across the entire UK, it would equate to about 648,000 businesses.
So what can you do about a bad hire?
You may have thought that all of this was leading to some inspired tips on how to avoid making this very costly mistake. Well, guess what? We've gone one better and written an entire article on how to spot AND avoid a bad hire. So next time you're hiring, dodge the cost of employing the wrong candidate and recruit right - first time.
Written by Dan Whitelegg