All HR managers and recruitment teams strive to hire the best talent. Not only does a great hire improve productivity and positively impact the company’s bottom line, it can also boost office morale and overall team spirit.
But what about the flip side? What are the effects of recruiting a bad hire?
For starters, the average cost of a bad hire is expensive. Hiring the wrong candidate can take a massive toll on a team’s work flow and productivity, affecting those around them like a domino effect. This means lost hours that could have been used for work. A Harvard Business Review article also states that 80% of employee turnover is due to bad hiring decisions. This isn’t surprising, given that if you end up onboarding a person who isn’t fit for the job or fails to cooperate with the team, some employees may feel compelled to quit because they can’t bear working with a bad hire.
When all of these problems occur, they all contribute to the cost of a bad hire, which can set off your long-term recruitment plans.
How much does a bad hire cost?
Results vary per industry but based on an article from HRFuture, the impact of a hiring decision is typically 50% of an employee’s annual salary. Other sources say that a bad hire can cost you 2.5 times the employee’s salary after counting the expenses in recruitment, onboarding, and training. This takes into consideration the following factors:
- 17% of a supervisor’s time, or about one day per week, will be spent managing a bad hire. This cuts you back on your productivity and the ability of the supervisor to lead the team efficiently.
- 34% of small business owners estimated that they waste over 50 hours hiring a wrong candidate. Those 50 hours are expensive when you calculate it into the average cost of a bad hire.
- 37% of extra training costs result from bad hires as they need more time to adjust to the pace of the workplace. Some of them can even take weeks to catch up.
Aside from those statistics, here are the other variables to consider when you want to know how to calculate the average cost of a bad hire:
- The negative impact on workforce performance.
- Recruitment advertising fees and staff time.
- The disruption that leads to project incompletion.
- Relocation and training fees for replacement hires.
- Outplacement services.
- Lost customers.
- Weakened employer brand.
- Litigation fees.
When you take all of these variables into consideration, the average cost of a bad hire can be astronomical.
For more information and inquiries about employee recruitment, don’t hesitate to contact Aptitude today.
How to calculate the cost of a bad hire?
Okay, now that we know what is the average cost of a bad hire, let’s get to the meat of this article. How do you exactly calculate it?
Here are three easy formulas that will break it down for you.
Formula 1: Time you spent on recruitment activities
To figure out what is the cost of a bad hire, start by calculating the time you spend on hiring activities. First, identify all the members in your recruitment team. Let’s say you have one HR manager, two recruiters, and a general manager who’s involved in every hire.
Next, determine how many hours per week each member spends on recruiting-related tasks. For instance, a recruiter spends 40 hours of their week on hiring and recruitment activities. Now, all you have to do is multiply that number by their rate per hour.
But of course, you can’t afford to spend weeks or months of your time attracting, recruiting, and onboarding new members to your team only to fire them later. To ensure you make better hiring decisions faster, it’ll be good to invest in a pre-employment test that lets you effectively screen top talent.
Formula 2: Cost of recruitment marketing
Let’s say you spend an average of Php5,000 per month on advertising each opening. If you have 10 open positions each month, that’s a total of Php50,000 on job ads alone.
Formula:
- Job Ads (A) = Php5,000
- Open positions (OP) = 10
- A x OP = Php50,000
Make sure you’re tracking which sources give you the most qualified leads so you don’t waste money sourcing candidates in the wrong places. Also, if you use a personality exam for employment, you can easily find the best fit candidates so you don’t have to always spend on recruitment advertising costs.
Formula 3: Revenue per employee
This next metric is crucial.
Great hires save you a ton of money in recruitment, onboarding, and retention costs, and of course, high-performing employees are good for your bottom line.
But what about bad hires? And how do you break that down into hard numbers so you also know what is the cost of a bad hire?
If you have access, check your firm’s year-end financial report for the revenue per employee. To get an estimate of the profit margin per hire, multiply that number by 40%.
Let’s say your revenue per employee is Php1,000,000. With the average profit contribution of 40%, each employee can bring in approximately Php400,000.
However, candidates in the top 25% of the talent pool typically bring in profit by an extra 25%. So if an average hire brings you Php400,000 in profit, an excellent hire will bring in a minimum of Php650,000. In this example, that’s a cost of Php250,000 in lackluster performance from a bad hire.
How to avoid recruiting bad hires
If you’re going to expand your operation, avoiding the cost of a bad hire is key. To keep your recruitment expenses and ensure you only onboard quality applicants, here are three pieces of advice.
1. Clarify your job ads
Exciting questions such as “Do you want a job with unlimited income potential?” are great in attracting applicants but unfortunately, they also entice people who are woefully unqualified.
Remember, applicant fit is more important than applicant volume. If you want to attract good hires, be sure the ones applying know the type of work your company does.
For instance, your job ads should contain realistic and concise terms such as:
- The position’s core duties
- Your company’s culture
- Compensation (at least give a range)
- Level of education
- Relevant hard and soft skills
- Other benefits
- Process of application
You might not find a candidate who ticks every box right away, but hold out until you spot individuals who can handle the core responsibilities and a good culture fit for your company. Finding those top-tier candidates all start with better job descriptions.
2. Get through the first round faster with pre employment skills testing
When recruiters hope to find the perfect candidate and avoid the cost of a bad hire, they tend to spend too much time on applicants in the early stage.
To help you weed out bad hires from high-quality candidates, invest in pre employment skills testing so that you can detect early on the applicants who won’t make the cut. Various pre employment tests measure the integrity, skills, and personality of the candidate.
3. Have an employee referral program
According to statistics from a recent Forbes article, 88% of employers believe that employee referral programs are the leading source of superior candidates. Since you have great people in your company, it’s highly likely they know great people too. Also, retention rates for referrals tend to be higher than candidates sourced through traditional methods such as job boards.
Not only does a referral program avoid you the costs of a bad hire, it helps you cut on overall recruitment costs too. You cut back on external recruiter expenses and job advertisements. You’re basically spending less on posting openings since your employees are doing the work for you.
Avoid the Bad Costs of a Bad Hire Today
In this article, we’ve tackled how much a bad hire costs, formulas to calculate the cost of a bad hire, and easy ways to steer clear from hiring non-qualified individuals. But here’s the hard truth: every company will make bad hires once in a while. There’s no formula to guarantee that each person you onboard will be an asset rather than a liability to your organization.
However, if you treat recruitment with reverence and actively find ways to avoid bad hires, you already stack the deck in your favor. Whether it’s through monitoring your cost per hire or investing in an integrity assessment test, the return of your efforts and investment will be huge.
I’m In! What Do I Do Next?
Reach out to learn more about our pre-employment testing services today and take advantage of our introductory promo. You’ll get a full overview of the questions as well as a sample report.
We can provide online or on-site training on how to administer the test and interpret the data given.