The true costs of a bad hire revealed (8 factors to consider)

Have you ever calculated the true cost of a bad hire i.e. someone who leaves your business within the first year of employment?

If not, don’t worry, we have a FREE Bad Hire Calculator that can tell you in a matter of seconds…

Would it surprise you to learn that on average, it costs upwards of 3 x salary when this happens, and it typically happens 30% of the time?* Imagine having a process in a business that fails 30% of the time, and not addressing it!

Good companies measure their employee turnover, but great companies always measure their new employee retention rate and, look for ways to mitigate the risk of someone leaving during their first year.

Here’s why…

They recognise that the lowest ROI occurs within that first 12-month period and understand the true cost of a bad hire is approximately 3 x salary.* This means that a £100k hire, who leaves before their first year anniversary will cost the business upwards of £300k and that’s terrible for their bottom line.

Let’s take a look at some of the obvious direct costs and not so obvious indirect costs associated with bad hires:

1. Unrecoverable Salary

2. Wasted Management Time/Training

3. Recruitment Agency Fees

4. Lost Productivity

5. Lost Team Productivity

6. Indirect Staff Turnover

7. Loss of Business

8. Impact on Reputation

1. Unrecoverable Salary

This needs little explanation however, you need to consider the weeks, months (or year) the bad-hire had been with the company, as bad-hires often have higher than average levels of sickness and other absences.

In addition, further costs can be accrued surrounding severance packages, HMRC contributions, bonuses and benefits. Naturally, these costs are higher the more senior the position the departing candidate holds.

*It’s a bit like a trip to the supermarket. You think it’s going to be X but it’s always three times that, and you're still left wondering what’s for dinner!

2. Wasted Management Time/Training

As Henry Ford said, “The only thing worse than training your employees and having them leave is not training them and having them stay”. We’ve all heard this quote before and know it to be true, so it’s not unusual for companies to invest hundreds of thousands in onboarding, induction, and training programs in the hope that new employees stay long-term. That said, you must ensure that you have the right people on the bus before you set off.

Costs associated with the education and training of bad-hires can be estimated as a share of company’s total annual investments into this area. For example, time and money spent on the new recruitment process, time and money spent on new training, lost productivity until the new recruit reaches optimal productivity (average of 28 weeks) and lost productivity of co-workers and supervisors for their time spent on bringing the employee up to speed.

3. Recruitment Agency Fee

If you pay 15% to a recruiter and the candidate leaves in, say, 9 months, then you must pay another recruiter 15% to find a replacement. That’s 30% + additional costs!

If you pay a recruiter, say, 25% and the candidate stays long-term, then that’s much cheaper. You may think I've manipulated these numbers to suit my agenda and you’d have a point, but here’s the thing…

The next time you're considering engaging with a recruiter and negotiating fees, ask them this question, “of the candidates you place, what percentage are still in situ after 12 months?”. If they don’t have this information, you should question the validity of their service. But, if you can obtain this stat, you can quickly calculate their value proposition.

To make that easier you can use our FREE bad hire calculator here.

4. Lost Productivity

It takes time for a new employee to produce the same level of work as the previous incumbent. To be specific, Oxford Economics and Unum claim that it takes at least 28 weeks depending on the role.

Costs associated with missed/delayed deliverables and loss of customers due to under-performers and lost productivity resulting from low staff morale are also important factors to consider.

5. Lost Team Productivity

This metric is usually hidden in plain sight.

You have a team of 10 and 4 of the new people leave. As a manager, you're completely consumed with getting the team back up to 10 and all that goes with it, that the super 6 get forgotten about. The team do their best to assume more responsibility, pick up the slack, fight the fires which all adds to their workload and stress levels.

So, in short, the current team is not as productive, the manager is not as productive, and the new people are constantly in learning mode. It doesn’t have to be this way, the obvious solution is to work toward a better new employee retention rate.

6. Indirect Staff Turnover

This occurs when members of a team leave at the same time, or one by one over a short period of time.

Let’s imagine that a team of 9 loses 5 people in the space of a few months. How will this affect the emotions, morale, and productivity of the remaining individuals. It’s much more likely to have a negative impact rather than a positive one, which may well lead to more people leaving.

Building a team is not a numbers game, it’s an emotional one so, understanding these drivers is explained here under the guise of 'Level 5 Leadership'.

7. Loss of Business

Staff grievances and low morale owing to disruption and increased workload hinder quality and overall performance and may, in turn, lead to increased staff turnover. The latter becomes particularly problematic if the organisation competes in a labour market sector that's impeded by scarcity of candidates and specialist skills.

Low staff morale and associated staff turnover are also particularly damaging in those cases where employees had developed successful relationships with clients, hence negatively impacting on the business’ reputation and its ability to deliver client solutions successfully.

Customer dissatisfaction is conducive to loss of business.

8. Impact on Reputation

And finally, branding.

“It takes a lifetime to build a reputation and a moment to ruin it”. A negative impact on the company’s reputation affects both existing and prospective clients.

Let’s imagine you have an important customer and over the last couple of years they’ve had 4 new Account Managers, due to a high turnover of staff on your part. They may become frustrated, they may devalue your brand in their own mind, they may have an argument to further reduce costs, they may leave.

Closing thoughts…

As we've seen, the true cost of a bad hire goes far beyond unrecoverable salary, affecting management time and training, costing recruitment agency fees, causing productivity and staff retention issues, damaging business reputation and more. Therefore, it's critical for companies to invest in the right hiring process to avoid these costs and associated negative impacts.

For a no-obligation discussion about how GrassGreener Group can help save your business both time and money when it comes to your recruitment process, click here

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