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The High Cost of Hiring the Wrong Person: Why Investing in Effective Recruitment Can Save You Money and Time
Reading Time: 7 minutes
Recruitment decisions are some of the most critical decisions that organizations make. The process of selecting the right employees for a company can significantly impact the organization’s productivity, culture, and financial success. Poor recruitment decisions can lead to several negative consequences, including financial, time, cultural, reputation, and legal costs. This article will explore the costs of poor recruitment decisions in detail and why it is essential for organizations to invest in effective recruitment processes.
Table of Contents
Financial Costs:
One of the most apparent costs of poor recruitment decisions is the financial cost. Companies often spend a significant amount of money advertising job openings, and if the wrong candidate is hired, this money can be wasted.
According to a study by the Society for Human Resource Management, the average cost of hiring a new employee is $4,129, and the average time to fill a position is 42 days. However, these costs can be much higher when poor recruitment decisions are made.
Furthermore, if a new hire requires extensive training and development to become productive, this can add to the overall cost of recruitment. According to a study by the Association for Talent Development, organizations spend an average of $1,273 per employee on training and development.
A study by The European Federation of Search & Selection Associates, concluded that the cost of a wrong hire is estimated to be between 1.5 and 4 times the wage cost of an employee. For example if a young graduate was hired at a compensation of €35000, and left after 4 months. the total cost could inflate up to €72500:
- €35,000 / 12 x 4 = +/- €11,500 (base salary + social and other contributions)
- Double that (€23,000) if we include miscellaneous charges and infrastructure costs (employers’ contributions, office, environment, miscellaneous expenses = coefficient ~ 1.8 to 2.2, according to location and profile).
- Then take into account the operating loss:
- This ‘uncollected added value in relation to the investment made’ can be estimated between 1.5 and 4 times the wage cost of an employee, depending on the activities and the share of personnel costs in EBITDA.
- At a factor of 2, the cost of the operating runs up to €46,000
- In addition, there is the cost of the actual recruitment of at least €3,500
- The total cost now already amounts to €72,500 (employment cost + operating loss + recruitment cost).
When it comes to more senior positions, the financial costs of poor recruitment decisions can be even more significant. This is due to the higher salaries and benefits typically associated with these roles, as well as the impact that senior employees can have on the organization as a whole. A study by the Harvard Business Review found that the cost of a bad hire at a senior level can be up to 15 times the employee’s base salary.
In short, poor recruitment decisions can be a costly mistake for organizations, both in terms of direct and indirect costs. By investing in effective recruitment practices and ensuring that new hires are a good fit for the organization, leaders can save time and money and drive business success.
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Time Costs:
Time is another critical cost associated with poor recruitment decisions. As it stands, the UK average for time to hire is almost 2 months.
The time it takes to fill a vacancy can have a significant impact on an organization’s productivity and revenue. Poor recruitment decisions can result in longer time to fill, which can leave a role vacant for an extended period and cause disruption to the team.
In addition to the time it takes to fill a vacancy, poor recruitment decisions can also result in longer training times for new employees. If a candidate is not properly qualified for the role, they may require additional training and support to bring them up to speed.
Onboarding new employees can also be a lengthy process, leading to more time lost. If an employee is terminated due to poor recruitment decisions, the company will need to go through the entire recruitment process again, leading to even more time lost.
Cultural Costs:
Poor recruitment decisions can also impact company culture. Hiring the wrong candidate can lead to a decrease in employee morale and motivation. This can result in a decrease in overall productivity, which can negatively impact the company’s culture. Additionally, poor recruitment decisions can lead to increased turnover rates, further impacting company culture.
Reputation Costs:
The reputation of a company can also be impacted by poor recruitment decisions. If a company hires the wrong candidate, it can lead to damage to the company’s reputation. This can result in a loss of customers and clients, making it difficult to attract top talent in the future. Poor recruitment decisions can also impact the company’s ability to compete with other organizations in the same industry.
In 2018, the financial services company Wells Fargo faced significant backlash after it was revealed that the company had been hiring employees without conducting proper background checks. The company’s recruitment processes had been outsourced to a third-party vendor, resulting in a significant backlog of background checks and delays in hiring. This led to increased turnover and decreased morale among employees.
By the time the company had identified the issue and taken steps to address it, they had lost significant revenue and suffered damage to their reputation. The costs associated with poor recruitment decisions in this case included lost productivity due to vacant roles, increased training time for new hires, and damage to the company’s reputation and bottom line.
Effective recruitment processes, including thorough background checks and streamlined hiring procedures, can help organizations avoid these costs and ensure that they are selecting the right candidates for the job.
Legal Costs:
Poor recruitment decisions can also result in legal costs. If a company terminates an employee due to poor recruitment decisions, the employee may choose to take legal action against the company. This can result in expensive legal fees and potential damages awarded to the terminated employee. Additionally, poor recruitment decisions can also result in legal action from customers or clients who may have been impacted by the employee’s poor performance or behavior.
In 2015, online shoe retailer Zappos made the decision to eliminate traditional job titles and adopt a holacratic management structure. However, the company failed to properly vet candidates for the new roles, resulting in poor recruitment decisions that led to low employee morale and a decrease in productivity. The company ultimately had to offer severance packages to around 14% of its workforce, resulting in millions of dollars in expenses.
In 2017, ride-sharing company Uber faced a public relations crisis when allegations of sexual harassment and discrimination were made against several employees. It was later revealed that some of these employees had been hired despite having a history of misconduct, highlighting the risks of poor recruitment decisions. The resulting scandal led to a decrease in customer trust and millions of dollars in legal fees and settlements.
These case studies illustrate the financial costs that can result from poor recruitment decisions. By investing in effective recruitment processes and taking the time to properly vet candidates, organizations can avoid these costs and ensure that they are selecting the right candidates for the job.
Frequently Asked Questions (FAQs):
What are some signs of a poor recruitment decision?
Some signs of a poor recruitment decision include low productivity, high turnover rates, decreased employee morale, and negative impacts on company culture.
How can companies avoid making poor recruitment decisions?
Companies can avoid making poor recruitment decisions by investing in effective recruitment processes, including developing clear job descriptions, utilizing a structured interview process, and conducting background checks.
What are some common mistakes made during the recruitment process?
Some common mistakes made during the recruitment process include not properly vetting candidates, not defining clear job requirements, and relying too heavily on subjective factors such as personal biases or gut feelings.
How can companies measure the success of their recruitment decisions?
Companies can measure the success of their recruitment decisions by tracking metrics such as employee retention rates, time-to-hire, and cost-per-hire.
Final Thoughts
The costs of poor recruitment decisions can have a significant impact on a company’s success, culture, and reputation. Investing in effective recruitment processes can help organizations avoid these costs and ensure that they are selecting the right candidates for the job. By taking the time to properly vet candidates, organizations can reduce the financial, time, cultural, reputation, and legal costs associated with poor recruitment decisions.
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Poor recruitment decisions can lead to several negative consequences, including financial, time, cultural, reputation, and legal costs. We explore the costs of poor recruitment decisions in detail and why it is essential for organizations to invest in effective recruitment processes.
How Can We Help
For the past 10 years, we have been supporting the growth of start ups, scale ups, and SMEs. We show them how to incorporate more meaningful data to make better hiring decisions, which saves them time and money. We are well–equipped to handle the unique challenges of small businesses and help to level the playing field in the pursuit of top talent.
With our experience and resources, we are able to provide a smooth transition into the company culture and ensure that new hires have an enjoyable onboarding experience.
If you are interested in learning more or are ready to start your next hire, contact me today, I will be happy to help.
Let’s get started!
Dave Crumby
Founder at 360 Talent Solutions
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