There are numerous estimates concerning the actual cost of a bad hire. These estimates range from 3 months’ salary to 3 times the annual salary of the position. While generic estimates provide a starting point, they only go so far.
To truly showcase the value of the talent acquisition department—and to illustrate how much it can save (and earn) for a company when provided the proper resources—it’s vital to understand your own company’s figures and present them in financial terms. Talking in dollars can help secure more resources for your department.
What Constitutes a Bad Hire?
First, it’s crucial to define a “bad hire.” Before we delve into the calculations, both the talent acquisition team and the business unit should be on the same page regarding this definition. Here are some parameters that might characterize a bad hire:
- Departure within the first 3/6/9/12 months
- Performance evaluations at level X or below
- Low manager satisfaction after 3/6 months (with “low” needing clear definition based on the assessment scale)
- Subpar objective key performance indicators (KPIs) (e.g., sales KPIs)
Gathering Basic Information
The hiring process involves various stakeholders, including recruiters, hiring managers, team members, and others. To accurately gauge the cost of time spent, it’s essential to have an hourly rate (or a close estimate) for each stakeholder.
Breaking Down the Costs
Once you’ve established the hourly rates, segment the hiring process into its specific stages and components. Here’s a suggested breakdown:
Job posting
- Job description formulation
- Salary benchmarking
- Posting across various platforms
- Advertising costs
Pre-screen
- CV reviews
- Rejection e-mail dispatches
- Scheduling and executing phone interviews
- Prehire assessment costs
Interviews
- Interview-scheduling
- Conducting all rounds
- Collating interview materials
- Decision-making
- Preparing and conducting assessment centers (if applicable)
Background and reference checks
- Conducting background checks
- Integrity tests
- Security debriefs
- Reference interviews
Offer
- Drafting the offer letter
- Contract negotiations
Onboarding
- HR procedures
- IT setups
- Employee salary for the first 3 months
- Time spent on onboarding by hiring managers and team members
Productivity loss
- Estimating what a competent hire would contribute during the initial 3/6 months, such as sales figures or upsell amounts
Scaling the Costs
The calculations thus far provide the cost for a single bad hire. However, most companies face multiple hiring mistakes. To estimate the comprehensive impact, extrapolate the single-hire cost across all instances of bad hires over a specific period, like a year.
To determine the annual expense, multiply the cost of one bad hire by the number of employees who meet the “bad hire” criteria. This calculation should be replicated for all roles in the organization or those you oversee.
Demonstrating Talent Acquisition’s Value to the Business
Your prior calculations likely yielded substantial numbers, highlighting the financial strain bad hires place on the company. So, how can you leverage these figures to your benefit?
- Monetizing talent acquisition work: Suppose you enhanced your hiring practices this year compared with the previous one. To showcase the monetary savings to the business, simply calculate the difference in the number of bad hires between the two years. The financial impact on the business will become evident.
- Making the business case for additional resources: If you aim to refine your hiring processes through new technologies or by bringing onboard more recruiters, juxtapose the expense of these added resources with the cost of bad hires. This will provide a compelling rationale for the investment.
- Raising awareness among hiring managers: Many hiring managers don’t view recruitment as a primary aspect of their role. Consequently, they may not allocate enough resources to hone their interviewing skills and might approach interviews without proper preparation. By illustrating the potential financial savings of adopting a more structured hiring approach, you can influence them to reevaluate and adjust their tactics.
Tangible Data, Tangible Value
In the evolving business landscape, understanding the true cost of a bad hire goes beyond generic estimates. It’s about grasping the tangible and intangible implications it has on the organization. Talent professionals are at the front line of this endeavor. By meticulously measuring every facet of the hiring process, they not only safeguard the company’s financial well-being but also elevate the stature of the talent acquisition department. Accurate insights can lead to more robust support and resources for refining recruitment practices. Therefore, talent professionals must champion the cause of meticulous evaluation and present the stark numbers to the business. Let’s not wait for another costly hiring mistake. Dive deep into your hiring metrics, quantify the financial repercussions, and advocate for the resources needed to refine and perfect your talent acquisition strategies.
Shiran Donach, PhD, is the Founder and CEO of Informed Decisions.