Over the years, there have been many studies conducted and articles written exploring the real cost of making a bad hiring decision.
Depending on the seniority of the employee and their potential to impact sales, costs, profit and business value; these studies reveal that the true cost to business of a bad hire can be anywhere between 30% and 500% of the annual salary of the employee in question.
Before examining the factors that can lead to a 5X multiple, let’s explore the out-of pocket costs that apply to every bad hiring decision (regardless of seniority or business impact). These costs generally fall between 30% and 150% of one’s starting salary and include:
- HR Interviews and advice
- Manager interviews and decision making
- Skills & psychological assessment
- Background and reference checks
INDUCTION, TRAINING & ONCOSTS
- Training investment in time and materials
- Business cards, IT setup and incidentals
- Employee oncosts – super, annual leave, payroll tax, office space
LOST PRODUCTIVITY & TERMINATION
- Salary of poor performers while they are employed by you
- Low productivity for first 3 - 6 months (estimated at 50% during induction)
- Reduced team productivity – assisting and training the poor performer
- Reduced manager productivity – distracted by poor performer
- HR termination advice – performance management or termination payout
- Negative effect on team morale
- Lost employee knowledge
Now let’s consider what pushes this multiple up to 500% of starting salary in instances where the employee has significant impact on sales, costs, profit or business value.
- High Impact Sales Roles
- In the case of a Sales Person, Key Account Manager or Sales Manager, poor performance could lead to the loss of one (or many) of your important customers.
- Given the average sales person is expected to generate at least 3X their salary in annual sales, it is easy to see how a poor performing sales person could cost you many times their annual salary in lost sales.
- High Impact Cost Roles
- These impacts are a little less obvious, but no less real.
- Consider a poor performing Purchasing Manager who locks you into a contract paying 10 or 20% above market price for particular products or services.
- Or a poor performing Plant, Manufacturing Manager or IT Manager, whose negligence causes you to lose productivity leading to a 1 or 2% increase in Cost of Goods Sold.
- High Impact Profit and Business Value Roles
- Typically filled by the CEO and their direct reports (COO, CMO, CFO, CTO, etc).
- In addition to being the highest paid people on the payroll, these employees control the company’s expenditure budgets, and are responsible for its sales and profit performance.
- A bad hire in one of these roles can quickly cost the company 5X their salary (and more) in reduced sales or profit for the year.
- This profit reduction also has an impact on business value - which is calculated on a multiple of profit or earnings - so if the direct cost of their poor performance is 5X salary, the loss of business value could be 3, 4 or even 10 times that amount.
You get the point.
Bad hiring decisions are very costly for any business.
So, why do they occur so often, and how can they be reduced?
According to TalentVine - Australia's trusted recruitment marketplace, the first part of the answer is simple:
- 50% of candidates misrepresent themselves in their CVs (with 30% containing blatant lies)
- 36% of companies (that made bad hiring decisions) did not assess the candidate’s skills well enough
- 27% felt pressured to fill the role quickly
- 10% did not run adequate reference checks
The solution to these problems is equally obvious:
- Use a professional recruitment firm to help you find the right candidates
- Allow them to properly test candidate skill levels before they are short-listed
- Insist that they run in-depth reference checks on all short-listed candidates
- Use HirePay to spread the cost of their recruitment fee into 6 easy monthly instalments
Contact us today to implement these solutions today!
Written by HirePay
HirePay is a technology platform that solves cash flow issues associated with the hiring process. The company was founded to help businesses hire better people by enabling them to use professional recruiters, or top consultants and pay their invoices in 4 easy monthly instalments (HirePay pays in full within 24 hours). HirePay also advances funds for contract work and labour hire. HirePay’s solutions have turned financing for hiring from a painful process into an easy one that’s completed and approved in minutes and is a win-win for all parties.