Costs of Hiring the Wrong Person Go Beyond the Financial
Oct 6, 2011
If you ever wonder why companies take so long in deciding which candidate to hire for a particular position, consider this: the cost of selecting the wrong person can run into the hundreds of thousands or even millions of dollars, not to mention the potential negative impact to a company’s reputation, morale and productivity.
Then there are those stories that grab media attention such as the alleged rogue trader who generated a $2.3 billion dollar loss for UBS that also led to the resignation of the bank’s CEO, and two high ranking executives, each of whom accepted responsibility for allowing it to happen on their watch.
The Economist notes that unsuccessful hiring is “the single biggest problem in business today” and The Harvard Business Review points out that as much as 80 percent of employee turnover is due to bad hiring decisions.
Can Cost Up to Five Times Annual Salary
According to the Labor Department, it costs on average one-third of a new hire’s annual salary to replace him or her. And those costs increase the higher up in the organization the turnover occurs. In some cases, it can total in the millions of dollars or up to five times the annual salary of the person being replaced, according to a study by the Society for Human Resources Management (SHRM), which found that the higher the person’s position and the longer they remain in that position, the more it will cost to replace him or her.
Some experts say that if you make a mistake in hiring and you recognize and rectify the mistake within six months, the cost of replacing that employee is still going to cost you two and one-half times the person's salary. That means a poor hiring decision for a candidate earning $150,000 per year could cost, on average, $375,000, and that expense comes right off the bottom line.
Why Are These Costs So High?
Expenses associated with hiring include interview expenses such as travel, hotel and meals, training and orientation, employment testing, termination costs such as Cobra, unemployment and potential litigation expenses should the candidate decide to sue you for wrongful dismissal, plus relocation costs and outplacement or career transition costs. But mostly it’s because you need to repeat the entire hiring process to replace the wrong hire, which includes time and expenses.
There are also hard-to-quantify costs that could be lethal to your business such as lower employee morale, customer dissatisfaction, lost customers, lost sales, reduced quality of products and low production.
“Plus, whenever someone is terminated, there’s a disruption among the other employees who begin to question what caused the termination and does it affect how their performance is evaluated, not to mention the increased work load on all the other employees who have to pick up the work of the employee who was let go,” explained Jean Gamble, who describes herself as a Human Capital Strategist and Recruitment Specialist.
Why Companies Hire the Wrong Person
A recent survey by Robert Half showed that one-third (36 percent) of 1,400 chief financial officers surveyed felt the top factor leading to a failed hire, aside from performance issues, is a poor skills match. The second most common reason (30 percent) was unclear performance objectives.
“Companies can’t afford hiring mistakes, which are costly and can erode staff morale,” said Max Messmer, chairman and CEO of Robert Half International and author of the Human Resources Kit For Dummies. “Finding the right match requires time and attention, and it’s something even busy managers need to make time for.”
Gamble, who runs the Chicago-based Jean Gamble & Associates, believes “wrong hiring” occurs because hiring managers and human resources people confuse the job description with the job criteria.
“The job definition and the criteria for the job are different,” says Gamble. “And often if you went to the people who actually perform the job, you’ll hear an entirely different description of what it takes to perform the necessary tasks than what’s posted in the job definition. That’s why it’s important to involve those who are actually doing the job in writing the description,” adds Gamble. “That way you avoid any miscommunication about what’s required to do a successful job.”
Another reason someone may not work out is due to what’s called the “cultural misfit.” This can occur when a candidate, who seemed perfect on nearly every level, clashes with the organization’s culture, which is why Gamble says “it’s critical that an open definition of the company’s culture exists in some form.” She adds that specific questions be part of the interview process to determine whether the candidate will fit within the firm’s culture.
“Because of corporate culture issues, interviewing methods have become very dynamic over the last 15 years,” says George Mentz, a management consultant, international lawyer and law professor with Thomas Jefferson School of Law in San Diego. “It has become much more likely that a job candidate will interview with not only several persons in the department, but even other managers and staffs in several other departments too,” Mentz adds. “This strategy is to try to find a fit for the group and not just the position.”
Many hiring managers make the mistake of choosing someone based on an instinctual “gut feeling” or because they “liked” a particular candidate, only to find out later that the candidate was completely ineffective for the position for which he or she was hired. Time and again, we’ve heard statements like, “She made us laugh so we hired her.”
Sometimes candidates are eliminated for some of the wrong reasons. For example, a perfectly fine candidate may have been part of a corporation downsizing and had to take consulting assignments to survive for a couple of years. Some hiring managers might misinterpret this and think there must be something wrong with that candidate when there really isn’t.
How Companies Can Avoid Hiring the Wrong Person
Working with a recruiter who specializes in a given field can help hiring managers identify job candidates with the appropriate skills. “Most recruiting firms conduct skills testing, which provides added assurance a prospective employee’s skills are a match,” Messmer says.
“An organization needs to look beyond the dates on a resume and focus on the skill sets the candidate brings to the table,” explains Gamble. “Yet, candidates have been eliminated for these reasons, and it is no reflection on their potential or ability to perform or be stable employees.”
The key to a successful hiring process, says Gamble, is to provide a clear definition of responsibilities for the job as well as the personality characteristics required for communication and success, along with which employees are involved in interviews, how information is collected and interpreted about the interviews and ultimately who has the authority to make the hire.
“You can’t just match keywords on a job description and expect a perfect hire,” she notes. “In fact, there are many times when the role is further defined during the interview process and job definitions can evolve by expanding or modified in some fashion.”
On the other hand, there are some detractors to this premise. A University of Michigan study on predictors of job performance found that the typical interview increased the likelihood of choosing the best candidate by less than two percent.
Five Tips for Better Hires
Here are some suggestions from Robert Half to improve your chances of hiring the right candidate:
1. Know what you want. Don’t recycle past job descriptions because chances are the role has changed. Take a fresh look at your needs and the skills you’d like to add to your team. A detailed job description will help reduce the number of resumes you receive from unqualified applicants.
2. Look for the intangibles. A candidate’s skill set isn’t limited to functional abilities -- it also includes how well he or she works in a collaborative environment. Employers that don’t take soft skills such as leadership and communication into account may set themselves up for a bad match.
3. Make a personal connection. Hiring is more than just identifying a strong resume or profile -- it involves having conversations with applicants to establish a rapport. Interviews, for example, allow you to delve deeper into an applicant’s qualifications while also assessing whether he or she is a fit for your corporate culture.
4. Use all your resources. Though you may have the final say, hiring should never be a solo effort. Take advantage of the tools available to you at your organization -- for example, human resources can help with the job description, and your employees may be able to offer referrals.
5. Woo your top choices. In any economy, people in high-demand may have multiple job offers. You need to show them why they should choose your organization over a competitor. Sell the benefits of working with your firm, and offer a compensation package in line with -- or ideally, above -- market rates.
Trend of Having Hires Churned Through a Portal
“It is unlikely that a key hire, especially in a complex financial services role, can be done successfully through a computer interface, and the trend of having hires churned through portal systems is having a lethal effect on hiring success ratios,” says one highly successful search consultant who is often called in after failure is recognized.
“A high level process is like a fine dining experience prepared by an expert chef as opposed to wolfing down overly processed ground mystery meat where you’re not sure what the real ingredients are,” she adds. “Therefore, more than ever, the skills and input of a really top notch executive search consultant is worth its weight in gold.”
The key is to understand that hiring the right candidate takes time, so be patient, develop a comprehensive hiring plan and execute it flawlessly. Remember, no hire is better than a bad hire.