Friday, April 20, 2012

How Much Are Bad Hires Costing Us?

Q: We want to fix our recruiting after some bad hires. How can we measure the effect, in dollars and other costs, of poor hiring decisions?
Penny-Pinching Recruiter, government, New South Wales, Australia

A: Dear Penny-Pinching Recruiter: Your question is as relevant today as it was 50 years ago — perhaps more so, with today's global economic challenges. The good news is that there are several benchmarks available to estimate the effect of a bad hiring decision. Industrial/organizational psychologists and economists have developed accurate estimation tools typically referred to as utility analyses. Most of them focus on the validity of the assessment tool (e.g., test, structured interview) being used to make the hiring decision.

Still, the assumptions are fundamentally the same with or without an elaborate assessment program. Ironically, even when using conservative mathematical methods, the results do not seem credible to managers. So it's no surprise you're asking for help.

First let's take a look at the obvious costs of a bad hiring decision: advertising, recruiter time, search firms, managers' interviewing time, candidate travel cost, relocation, training resources and more. At the same time, hidden costs include losses in productivity, lost opportunity for business growth, onboarding efforts, employee morale and company image. When you consider expatriate assignments, expect relocation costs to range from about $500,000 to $1 million.

A quick and highly conservative measure that is often used is to assume that a bad hire costs your company 1.5 times the annual "fully loaded" compensation of white-collar workers. Thus, a bad hire for someone paid $100,000, including benefits, will cost your company $150,000 to replace.

For blue-collar positions, you may want to use the formula of 1 to 1. In a 2007 survey of companies, Right Management reported estimated costs of three times that of base salary. The fact is that the costs of a bad hire will vary from company to company and situation to situation.

An online Internet search will yield dozens of quick "cost-of-bad-hire" calculators, some better and more comprehensive than others. The bottom line: You will need to do your homework. Here are a couple of suggestions to follow:

1. Determine which cost categories your stakeholders are likely to accept as credible.
2. Work closely with your internal financial group to gain its blessing on the assumption used in your estimate. This goes far in getting senior management's attention.

David E. Smith, Easi-Consult, St. Louis

Thanks to Workforce / Crain Communications Inc.

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