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The Cost of Hiring the Wrong Person

Recruitment can be a costly business, particularly if things go wrong. One way to put a figure on it is to consider the number of people who leave an organization – or are fired – during their first year.  PricewaterhouseCoopers (PwC) has a metric to help. In 2013, it says, first-year-of-service turnover among U.S. organizations was 24.1% -- which means that, in a hypothetical 10,000-employee company with a 10% hiring rate, 241 of its 1,000 annual recruits are being lost.

Based on a combination of expenses directly related to the hiring process and indirect expenses, such as lost productivity while the new recruit learns the ropes, PwC calculates that each person who leaves costs the organization 1 to 1.2 times their salary.  For an employee earning $50,000, the cost would be $50,000 to $60,000. And in our hypothetical organization, it’s 241 times $60,000 – a figure not far short of $15 million.

The first-year-of-service turnover rate has been climbing steadily from a historic low of 21.5% in 2011 and should serve as a wake-up call for many companies. “Twenty-four percent is a high number,” says Ranjan Dutta, a director at PwC Saratoga.  “Organizations need to identify whether the problem is in the selection or the onboarding process and find ways to make that recruitment ‘pipeline’ more efficient or effective. If you can keep just 10% of the 241, you’ve saved more than $1 million.”

In smaller companies, managers might reckon the cost of a bad hire by calculating what it costs to get rid of the person and recruit another in their place. But bad recruitment decisions have an impact on companies, no matter what their size. “Mistakes are very costly,” says Lou Adler, CEO of Irvine, CA-based recruitment specialists The Adler Group. “Usually the mistake is hiring someone who is ineffective. They may be a nice person recruited in a hurry who does not have the skills. Or they may have the skills and not be motivated. Or they may have a bad attitude and de-motivate others. Companies try to avoid all three of those mistakes.”

They don’t always succeed, of course. Potentially “toxic” individuals sometimes get hired – at middle and senior management levels, says Andre Spicer, professor of organizational behavior at Cass Business School at London’s City University. “They infect the culture around them and become negative role models – but it’s very difficult to cost that. They are often people recruited from the outside who look good on paper, but in reality they are very difficult to work with. In senior positions, they can stifle people below them.”   

Management consultant ArLyne Diamond, founder of Santa Clara, CA-based Diamond Associates, questions the usefulness of trying to quantify the cost of a bad hire. “The cost is not just the loss of work product from the individual,” she says. “The cost can spread through the group, which makes it somewhat immeasurable.  That can happen even when the person is flipping burgers. But if the job requires creativity, and you’ve hired the B player, how do you measure what the person you didn’t hire could have given you?”    

 For Diamond, recruitment is a perennial problem. “HR recruiters are bound by a narrow scope,” she says. “They don’t know how to size up the people they are talking to beyond what school they went to and how many years experience they have. It is rare to find someone within a company who knows how to do an evaluation to come out with a real assessment of a potential candidate. And in group interviews, if the candidate is outstanding they are going to scare one or two people in that group. The most mediocre person has the most likelihood of being accepted.”

If PwC’s Global CEO Survey is to be believed, recruitment is an issue that causes sleepless nights. In the latest round of the survey, for which the company interviewed 1,344 chief executives in 68 countries, 93% said their strategies for attracting or retaining talent needed to change. PwC points out, however, that CEOs have been flagging up talent management as a problem for the past seven years. And 61% have yet to take the first step towards strategic change.

Yet the issue is becoming more urgent. The question of finding and keeping talent is fairly academic when no one is hiring. But the 2014 survey suggests that confidence is picking up in the global economy, 50% of those interviewed were planning to increase their company’s headcount in the next 12 months – and high flyers are eyeing up new jobs. “The folks who have been sticking with an organization, even though they’re unhappy, are now beginning to venture out and the war for talent is on,” says Dutta. “We can see that in the U.S. metrics: high-performer separation rates have jumped almost 20% year on year.”

It would be a mistake, Dutta argues, to dwell on the 61% who have not begun to change their recruitment strategies. Look instead, he says, at the more advanced organizations, and you’ll see that they are looking into ways to align HR more closely with the business, to improve the quality of new hires and to understand what needs to be done to keep them on board.

Above all, they are beginning to use workforce analytics to bolster recruitment in the way that marketing departments began to explore customer data to fine-tune product development 20 years ago. “If you think about big data, its biggest application is in the marketing field,” he says. “Now we can see the wave coming to HR. Companies have tons of data on their employees, but it has not been used to the organization’s advantage – whether that is in hiring the right people or making sure the high performers stay with the organization or developing new reward strategies.”

Big data is being harnessed to change the recruitment process in other ways, too. Companies such as CA-based TalentBin and Entelo, both relative newcomers to the scene, are scanning social media to spot changes such as people adding recommendations on LinkedIn or changing their profile photo—sure indicators, they reckon, that someone is poised to enter the job market.  “Recruitment is an issue, but the real story is how recruiters are using big data,” says Jeanne Meister, founding partner of New York-based Future Workplace. “These companies are capturing information that candidates have made public to develop an algorithm about them. The interesting thing is that the algorithm is about both the candidate and the company they work for. So let’s say someone is updating their profile and at the same time we can see that their company is laying people off: It’s pretty certain they are about to enter the job market. “

Savvy recruiters are also using social media to relate to the millennial mindset. “Millennials—those born between 1977 and 1997—are perennial job-hoppers,” Meister continues. “They are staying in jobs around 2.5 to 3 years, and one study suggests that on average they spend just 15 minutes before a job interview researching the company on their smartphone. So companies such as McDonald’s are realizing that they should make it possible to do the whole recruitment process using an app on a smartphone. Other companies are using new media to build talent communities to keep in touch with people they hope to recruit later.”

As the war for talent heats up, employers have a choice. As Lou Adler sees it, they can continue as before, selecting people similar to those that they have always hired – and try to avoid mistakes. But if they want to snare the best people, they should figure out how to offer them career growth. “To raise the talent bar, you’ve got to rethink the whole process,” he says. “If you want to hire stronger people, you have to understand how stronger people look for jobs, how they decide and compare opportunities. A good person always has good opportunities, so they are not necessarily looking. The reason for even looking in the first place is because they want to stretch themselves and make a career move.”

As revitalized HR departments, armed with big data and social media, seek to improve companies’ chances of finding the talent they need, they can also help reduce the risks of making a bad hire. But there’s room, too, for low-tech and no-tech innovation: why not involve a candidate’s peers in hiring decisions and the recruitment process, asks Andre Spicer, rather than leaving the task to more senior people.

Spicer also sounds a warning regarding the growing reliance on big data and recruitment consultants. “They have an interest in pushing the process along and making quick hiring decisions when it’s actually better to take a little bit more time.” Adler, too, favors an unhurried interview process in which discussion of compensation is balanced against what the company can offer the candidate in terms of career growth. But given the nature of human beings, it’s likely the foolproof recruitment strategy will always prove elusive. The face-to-face interview offers the only way of making a real assessment of a person, says ArLyne Diamond, granted that your interviewers “can psych people out!”

 

Jane Ure-Smith is a freelance journalist, based in the UK, and focusing on business, travel and the visual arts.

Comments

Warren Miller
Title: Cofounder
Company: Beckmill Research, LLC
(Cofounder, Beckmill Research, LLC) |

@Wayne: Do you mean 'IDIC' in a Trekkie sense?

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Ahhh, another Trekkie :)

Anonymous
(MBA CGMA CRMA, Past Chief Audit Executive) |

I'd like to add a comment for consideration. I was employed at a company whose culture itself had a reputation for high turnover. The CEO was from the "older" generation and wasn't considered a person with much tact or sensitivity. During a leadership meeting of over 150 employees from the 8000 employee base, the CEO talked about "bad hires". The trouble was, the concept was more focused on the fact that the hire "didn't meet the company's culture", "didn't fit in" or wasn't of the right attitude. It was well known in this company that the two year mark was a sign of whether the individual could actually tolerate and adjust to the company culture.

In this situation, it was almost never a "bad hire" from an employee skill, talent or ability perspective; it was a "bad hire" because of the toxic environment of the company.

The company's HR department started doing personality tests and also culture tests on new hires. That because a whole different disaster and tell tail sign of a bad culture.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

"The company's HR department started doing personality tests and also culture tests on new hires. That because a whole different disaster and tell tail sign of a bad culture."

What ever the reason for the "tests", is this a company you really want to work for? Seems someone doesn't understand the concept of IDIC.

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