We want to fix our recruiting following some bad hires. How can we measure the impact, both in dollars and other costs, of poor hiring decisions?
Fiscally Frugal Recruiter, Government, New South Wales, Australia_____________________________________________________________________________________
Dear Fiscally Frugal 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 today there are several benchmarks available to evaluate the impact of a bad hiring decision. Industrial-organizational (I-O) psychologists and economists have developed accurate estimation tools typically referred to as utility analyses. Most of them focus on the validity and/or accuracy of the assessment tool (e.g., test, structured interview, etc.) being used to make the hiring decision. 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 (Cascio, 1993). So, it’s no surprise you’re asking for help.
The obvious costs of a bad hiring decision could include advertising, recruiter time, search firm cost, interviewing-managers’ time, candidate travel cost, relocation, training resources, and more. At the same time, hidden costs are reflected in the loss in productivity, business growth opportunity, onboarding efforts, employee morale, and company image. When you get into expatriate assignments, you can add relocation costs between one-half to one million dollars.
The method of calculations is for another conversation. However, a quick and highly conservative measure used by many HR professionals and I-O psychologists is to assume a bad hire costs a company one and a half times the annual fully loaded compensation of white-collar workers. So, a bad hire for someone compensated $100K (including benefits) will cost a company $150K 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 base salary. The fact is that the cost of a bad hire will vary from company to company and situation to situation.
With a simple Google search, you’ll find dozens of quick “cost-of-bad-hire” calculators, some better than others, some more comprehensive. The bottom line is that you will need to do your homework. A couple of suggestions to follow:
- Determine which cost categories your stakeholders will likely accept as credible.
- Work closely with your internal financial group to gain their support on any assumption you put into your estimate.
This will go a long way in getting senior management’s attention.
David E. Smith, Ph.D.