Business professionals know how to calculate ROI, return on investment. But how do you calculate a loss on investment?
It’s the kind of math no one wants to do. Yet when you hire the wrong people, you need to understand it. The true cost of a bad hire varies widely, but we can still make reasonable assumptions. Jörgen Sundberg, founder of LinkHumans and a former recruiter, broke the cost down into several key areas:
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Hiring costs
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Total compensation
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Costs of maintaining employees
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Disruption costs
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Severance
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Mistakes, failures, and missed opportunities
Forbes and Inc. frequently reference this calculation. Sundberg estimates that a bad hire—like a second-level manager earning $65K and terminated after 2.5 years—can cost $840,000. That’s a -298% return when you weigh the investment (hiring cost + compensation + maintenance) against the employee’s contributions.
Retention Begins with a Good Hire
No one would make an investment that returns -298%. Turnover is expensive, but many leaders focus only on what happens after someone starts. The real issue often begins before the hire.
Technology continues to improve employee engagement, but hiring remains one of the hardest and most important drivers of business health. Monster’s 2018 State of Recruiting Survey found that 67% of recruiters say their jobs are harder than they were five years ago.
At the same time, the unemployment rate keeps shrinking. It peaked at 10% in 2009. By August of this year, the U.S. Bureau of Labor Statistics reported a rate of 3.7%. A smaller talent pool and changing candidate expectations mean companies now fight harder for top performers.
Competitive pay and healthcare aren’t enough anymore. Candidates want “permanent workplace flexibility, a commitment to health and well-being, and work with purpose,” says Forbes contributor Alan Kohll. This demand helps explain why organizations now spend an average of $1,296 per employee on learning and development, according to ATD’s 2018 State of the Industry report.
Ironically, companies still end up with poor fits—often because they rush to fill roles despite the heavy investment in training and retention.
The Cascading Effects
The true cost of a bad hire comes from the ripple effects. A poor fit, whether underqualified or overqualified, creates damage far beyond payroll.
Finance teams understand this well. SHRM reports that, in a survey of 2,100 CFOs, 39% worried most about staff morale and 34% about productivity drops. Direct monetary costs ranked third at 25%.
Lost sales, wasted management time, and added training all create financial strain. But the deeper losses aren’t financial. Managers spend extra hours trying to salvage the situation, draining their own energy and pulling attention from other employees. Glassdoor’s Mariah DeLeon notes that 35% of respondents say a poor hire “greatly influences employee morale.”
Long-term effects can also reach customers. Entrepreneur.com recommends monitoring reputation closely to understand how a hire may be hurting the business. Forbes contributor Falon Fatemi adds that “disengagement is contagious,” which explains why employers struggle to stop it once it spreads.
The Right Partner Keeps Your ROI Positive
The importance of hiring the right employee doesn’t make transforming hiring or retention practices easy or cheap. For example, learning and development is a key way employers are retaining their top talent, developing competencies and focusing on career growth. ATD reported that U.S. organizations spent 164.2 billion on employee training and development in 2012 (beginning 2013, per-employee expenditures were provided rather than total).
For highly skilled positions, hiring becomes even more complex. In fact, “79% of companies report that they have skills gaps that are difficult to close and most say they don’t understand how to solve this problem,” according to Sarah Fister Gale for Workforce.com. Demand for positions in highly technical industries like ICT and emerging tech is expected to continue expanding for the next decade.
McKinsey & Company’s 2017 report Jobs Lost, Jobs Gained: Workforce Transitions in a Time of Automation compares potential new jobs created to the jobs that could be lost to automation through 2030. “Overall spending on technology could increase by more than 50% between 2015 and 2030. About half would be on information-technology services. The number of people employed in these occupations is small compared to those in healthcare or construction, but they are high-wage occupations. By 2030, we estimate that this trend could create 20 million to 50 million jobs globally.”
These are reasons why especially those companies with expanding needs for these highly skilled roles in technology can benefit from outsourcing the recruitment process to a company like HNM Systems. Outsourcing makes immediately available a scalable, proven process that could take an individual company years to hone.
What’s more, HNM relieves employers of the added cost associated with maintaining engagement with this specialized group. The standard benefits touted in regards to outsourcing recruitment end at the time of placement, but because HNM maintains their relationship with their employees, the continued cost of engagement and development is avoided as well.
And HNM is doing engagement well. HNM Systems President and CEO Heather Moyer is proud that clients are able to retain employees at 90% or greater. This is the result of what Moyer calls “doing life” with HNM employees. In fact, a consultant/employee development committee is focused primarily on making sure employee needs are being met.
Bad Hiring Is Solved by Better Recruitment, Not Retention
Fatemi recalled a time when a bad hire’s impact led to losing 2 key employees. “That’s an exceptionally high price to pay […] You’ll never wish you waited longer to fire someone like that.”
If a company cannot afford the exorbitantly high cost of a bad hire, it cannot wait to take the steps that will help them to avoid a $840,000 mistake. “[A] bad hire’s effect on company culture echoes beyond the employee’s tenure. Poor performers lower the bar for other employees, and bad habits spread like a virus,” says Fatemi.
But avoiding the cost of a bad hire is not to be outshined by the benefits of making a good hire. As much as the impact of a poor choice reverberates beyond the single individual, finding the right person with the right skill set with the right culture fit has its own reverberating effects.
