Organizations always seem to be worried about budgets, and rightfully so, but in overlooking a very key aspect they may be costing themselves more than they know. It’s often said that people are a company’s greatest asset. Just as a great hire can positively alter the trajectory of a company or a department, so too can a mis-hire negatively impact an organization in a big way. It’s often difficult to calculate the actual cost of a mis-hire because there are straightforward quantitative costs (salary and bonuses), but also some more abstract costs involved (time and opportunity cost). Recently I’ve had this discussion with many hiring authorities and very few of them truly realized all the ways in which a mis-hire can impact an organization.
First let’s start by breaking down the financial burden of a mis-hire. At Workforce, based on their studies, the average cost of a mis-hire can be six times base salary for a sales rep, 15 times base salary for a manager, and as much as 27 times base salary for an executive. Ouch!
How can that be possible?
- Hiring cost (search fees, testing/assessments, background checks, HR time and administrative fees for all candidates, travel costs, time of non-HR people interviewing and reviewing resumes, relocations, etc…)
- Compensation (base salary x time employed, bonuses, stocks, benefits, etc…)
- Maintenance (training, office costs, furniture, computer, travel, administrative assistant, etc…)
- Severance (severance package, legal fees, administrative costs, etc…)
- Mistakes (failures, missed opportunities, etc…)
- Disruption (inefficiency in organization, lower morale, impaired teamwork)
- Wasted Time (amount of time spent by administrative, colleagues, or bosses spent dealing with employees or covering for and dealing with mistakes)
- Contributions (the one positive category – what is the value of the contributions that person made to the bottom line)
If you want to give this formula a try in reality here is a link to a Cost of a Mis-Hire Calculator that is provided by Topgrading.
Now that the gravity of a mis-hire has been brought fully into the light, the question is how can organizations do their best to avoid a mis-hire? As mentioned in our last article the most important factor on the front end of the process is to make sure you are attracting the absolute best talent, not just the best available.
The primary reason I wanted to point out all the costs of a mis-hire is to alert organizations that it’s better to spend more time and resources on the front end to ensure you get the hire correct the first time than deal with the consequences of a mis-hire and scramble to make up for it, which may in-turn compound the error. Pinching pennies doesn’t always save money in the long run.