Estimating the Cost of a Bad Hire

Guest post by: Suzanne Simpson
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Estimating the Cost of a Bad Hire - By Suzanne Simpson

Need employee commitment? Start with competencies.

You’ve just spent weeks advertising, interviewing and assessing candidates for a position and you’ve finally made the hiring decision. You bring your new hire on board, put them through orientation, build them a learning plan, start their training and-3 months in-they quit!

Regardless of size or sector, most organizations have at some point experienced a “bad hire,” and in doing so have paid dearly for a seemingly routine hiring. To illustrate this point, we examine the cost of an employee with a salary of $50,000 who terminates after 3 months.

Cost Area	Estimated Cost
HR Time (internal HR Dept) – salary $65,000 Create specifications for the position Prepare classified ad Review resumes from 50 ad responses Telephone screen ten candidates Schedule, prepare for and conduct five interviews Conduct assessment testing for three candidates Reference check for three candidates	*$51/hr. X 30 hrs = $1,530**
Other Recruitment / Interviewing Management interview time ($ per hour x hours) – salary $80,000 Other interviewers’ time ($ per hour x hours) – salary $60,000 Cost of advertising (3” ad run for three Sundays)	$63/hr.* X 6 hrs = $378 $47/hr.* X 9 hrs = $423 $2,016
Salary and Related Costs - $50,000 Salary (for three months) Benefits (based on national average of 35%) Overhead, administrative expense, etc. (20%)	$12,498 $4,374 $2,500
Training / Orientation / Answering Questions Trainer’s time ($ per hour x hours) – salary $60,000 Manager’s time ($ per hour x hours) – salary $80,000	$47/hr.* X 16 hrs = $752 $63/hr.* X 8 hrs = $504
Productivity Losses Compensating for sub-standard performance (co-workers doing or re-doing bad hire’s work: assumes bad hire is working at 75% capacity) (therefore, another 25% of their hourly total salary is an additional cost)	*$10/hr. X 120 hrs = $1,200**
Grand Total	= $26,175

*Hourly rate is based on the average wage for the position plus 35% for statutory holidays and benefits and 20% overhead burden. (i.e. $50,000 salary + statutory holidays, benefits and overhead = $75,000 real cost of employee)

These quantifiable figures quickly add up and do not take into account the hard to quantify costs of:

• lost business;

• severance;

• legal fees; and,

• additional recruitment, training, and orientation costs etc., incurred as a result of having to hire a replacement

Many of today’s organizations are fully aware of the high price they pay for employee turnover. What they don’t know, is how to combat the loss.

Retention initiatives usually take place after the fact, in an attempt to hold on to existing employees through initiatives like workplace wellness programs, career development and competitive compensation and benefits. While these initiatives are key to maintaining a positive and sustainable relationship between employer and employee, they will not be successful in retaining an employee who does not “fit” into the organization, is not happy on the job, or lacks certain motivational characteristics that could have been identified right from the start.

Attracting and Selecting the Right Talent

Attracting and selecting the right talent in the first place is paramount to retaining employees further down the road. In practice, this means implementing sound, valid and reliable recruitment and selection processes that directly assess the behaviours relevant to success on the job and within the organization. Most managers are able to articulate their needs for and select candidates with the right professional and technical skills. Where they often fall short, however, is in selecting for those “softer” skill sets that can “make or break” the organization. Employees’ interpersonal and communication styles can play as important (if not more important) a role as their technical and professional skills and qualifications. The challenge for most managers in the selection process, however, is to gain an accurate reading of the competencies of candidates in these “softer” skill areas. This is where Competency-based Selection comes to the rescue.

Traditional interview approaches focus on discussing the candidate’s previous experience for the purpose of gaining an impression of his/her accomplishments without pre-defining the expected behaviour required for success on the job, or seeking evidence that the candidate actually demonstrated the skill in doing the work. An example of such an interview question is: “What experience do you have in customer service?” In addition, too much reliance is placed on the candidate’s self-perception or opinion by asking questions such as “What are your strengths and weaknesses? Where do you see yourself in 5 or 10 years? How would your friends describe you?” These questions do not directly assess candidate behaviour that is relevant to success on the job.

Success through Competencies

Competencies, on the other hand, are observable abilities, skills, knowledge, motivations or traits defined in terms of the behaviors needed for successful job performance. They translate the strategic vision and goals for the organization into behaviors or actions employees must display for the organization and the individual to thrive. Using competencies for selection reduces the risk of a bad hire as it increases the validity of the recruitment process through:

• focus on both technical and behavioral components of the job;

• Standardized selection criteria;

• Well-researched, job-related behaviors;

• Well defined definitions, known in advance;

• A streamlined, consistent process; and,

• A variety of selection tools to increase incremental validity.

Selection tools that can incorporate Competency-based assessment include: structured interviews, reference checks, track record reviews, role plays and work samples to name a few, all supported by standardized rating scales that incorporate competency criteria. But don’t stop there. Competencies can be integrated into the complete HR system as the foundation for coordinating learning and development, performance management and succession planning.

Reap the Competency Rewards

Defining the competencies for your particular environment and culture is critical and requires expert help. With the right groundwork, the benefits are more than worth the effort. Reduced tension among the work force, people working in the areas that best suit their capabilities, reduced turnover, increased productivity, and achievement of goals and objectives are just some of the benefits of having a Competency-based HR system.

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Estimating the Cost of a Bad Hire - By Suzanne Simpson

About the Author: Suzanne Simpson

RSS for Suzanne's articles - Visit Suzanne's website
Dr. Simpson is a registered Industrial / Organizational Psychologist. Her focus throughout her thirty-five year career has been on developing and implementing Talent Management systems that propel organizations to higher levels of success and encourage respectful and welcoming work environments. She has managed and supported many organizations as well as whole occupational sectors in defining competency frameworks and in developing and implementing competency-based talent management products, programs, processes and assessment systems.
She is well recognized by her peers in Industrial Psychology in Canada and sought after around the world as a speaker and facilitator on the topic of Competency-based Talent Management. As an entrepreneur and business owner, the Women's Business Network recognized Suzanne as a finalist for the title of Business Woman of the Year (2007).
Click here to visit Suzanne's website.

More from Suzanne Simpson
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ReTooling Your Employees for Change
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