The Cost of Hiring the Wrong Employee
by Meredith McGhan
As a manager, you may not be constantly thinking about the cost of hiring employees, but you’ve probably had this happen: you’ve hired someone you want to believe can do the job. After all, they were the best out of everyone you interviewed, and it took a long time to find them — long enough for your company’s profits to dip because no one was in that position, and because you and your staff were busy looking for a replacement and other things got put on the back burner.
The new hire’s decent at the job, and you’re sure that once they learn the ropes, they’ll be great. The fact that they’re new is a plus, in a way — you don’t have to pay them what their predecessor made, and therefore your company’s saving money in the long run, right?
Wrong. Those offsets aren’t going to reduce the cost of hiring employees, especially if you hire the wrong one. If you were to stop and add up what your company lost during the search process, and while your new person is getting a toehold in the organization, you’d be lucky to break even.
There are many hidden costs attendant to the termination and hiring cycle, including revenue losses, outlays of extra cash, and man-hours spent in various recruiting duties by all levels of staff – especially for small businesses. Here’s a list of the typical ones — though it’s always prudent to expect the unexpected, and look at this list as conservative and by no means comprehensive.
Elements of The Costs of Hiring
Losses of revenue:
- Lost knowledge, experience, customers, and network of person leaving
- Lost productivity for each week the position is vacant
- Lost productivity during learning curve of new hire and those helping them
Added outlay costs:
- Paycheck of the person filling in
- Investment in training the leaving employee
- Severance pay, continuing benefits, and unemployment compensation for the leaving employee
- Advertising for the new position in classifieds and on job boards
- Background checks, drug testing, and assessments for short-listed candidates
Man-hours expended on extra recruiting tasks:
- Exit interview and payroll processing for the leaving employee
- Sorting through resumes by administrative staff and management
- Sourcing candidates through networks
- Responding to job inquiries
- Interviewing by multiple managers
- Orientation and training including time and materials
- Training tasks by the new hire’s immediate supervisor
- Processing new hire for payroll and benefits
These costs will be true for any employee, whether a perfect, good, or bad fit with your organization. However, they increase when a new hire fits poorly with the position and organization.
How Bad Personnel Decisions Increase Hiring Costs
Let’s say the worst has happened, and you’ve hired someone who is simply a bad fit. They’re either going to realize it first and leave, or you’re going to realize it first and terminate them. Either way, you have to start the whole process over again, and risk losing even more revenue. Whether they leave on their own or are terminated, there are costs associated with processing them out. If they qualify for unemployment and collect for a long period of time, those costs are extended. It’s also important to keep in mind that turnover costs are even higher when you’re filling managerial and sales positions. Hiring a weak team member may result in a loss of morale among other team members. Reputation can weaken as customers grow aware that the company is operating at less than peak performance. All these lead to loss of revenue.
Let’s say there’s a happy ending — your new hire learns the ropes and eventually becomes as good at their job as their predecessor. You still have a loss of productivity during the learning curve even with the best of all possible outcomes. Depending on the position and the hire, that loss can be equivalent to three to 12 months of salary and benefits.
The cost of hiring the wrong employee is substantially greater than the cost of hiring a more productive new person, even at a higher salary. The most effective solution is to stop this problem before it starts by using an outside recruiter who can assess your needs and efficiently fill your position with a perfect match.
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