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The real cost of making a bad hire

Posted on 4th June 2020 by Jo Lothian

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Poor hiring decisions can be detrimental for company morale, productivity and reputation. The financial impact is significant too, and it's more than you might think. In fact, one survey estimates that bad hiring decisions for non-executive positions in Australia cost between 30% to 150% of the employee’s annual salary. Learn more about the hidden costs of making the wrong hire, and why you should think carefully about your next recruitment drive.

The cost of filling a position

A joint research project between Performia and SmartCompany revealed that 27% of SMEs had lost money as a consequence of poor hiring. Much of this financial loss is incurred during the recruitment process, with recruiting costs both in time and money. One study found that it can take up to 68 days to fill a position, while a report by the Society for Human resource Management estimated the average cost of a new hire to be $4,129.

Direct and indirect recruitment expenses

If you don’t use a recruitment agency, direct expenses can include advertising, reference and background checking, recruiting events, employment contracts and training and upskilling costs. You’ll have to take into account indirect expenses such as labour and lost productivity of staff involved in the hiring process which can be significant, as well as onboarding and training costs. That’s a high price to pay for an employee that doesn’t work out.

The hidden cost of onboarding a new employee

When the new hire takes up employment, costs continue to accrue. Learning a new job takes time. And, typically, new employees are not contributing fully to the business during the first few months of their contract despite taking home a full salary. Research by Foresee estimates that new hires work at 50% productivity for the first three months of their contract, while The Allied Workforce Mobility Survey found that it could take as much as eight months for a newly hired employee to reach full productivity.

Why you should think of recruitment as an investment

Think of your new start – and this initial training period – as an investment. If you hire well, you’ll reap the rewards when the new employee is fully trained and working at full productivity. In effect, you’ll see a return of your initial investment. However, if you hire badly – or make a bad investment – your initial outlays are never recuperated.

How bad hiring impacts workplace productivity and morale

When you don’t hire well the impact can be detrimental to workplace relationships and morale, as a bad co-worker can be greatly disruptive for both the staff and the business. Employees may become reluctant to work with one another, or may have to take time away from their own tasks to mentor, train or correct the new start. Overall, placing a disengaged, incompetent or poor culture fit candidate will have a domino effect on workplace productivity.

The true cost of your payroll

Employers pay more than just the base salaries of their employees. A workforce incurs ongoing upkeep and entitlement costs which will vary by company, industry and location., Typically an employer will pay towards taxes, benefits, training, software and equipment , they will also be entitled to superannuation contributions, sick/carer’s leave, public holiday loading and annual holiday leave. And so while a productive employee will be a worthwhile addition to your payroll, keep in mind that the wrong hire will be costing you much more than just their salary.

Reputational costs

While it may be difficult to put an exact figure on how much your company’s reputation is worth, there’s little doubt that few businesses can afford to risk reputational damage. And, unfortunately, in the digital arena, even one disgruntled or resentful employee can have a catastrophic impact on your business. An unhappy employee can leave negative reviews on feedback and company review sites online, which may be read by clients, customers, job seekers and other employees. Rebuilding either your client list or your reputation can be an expensive battle, one you can minimise by hiring the best person in the first place.

No company can afford to make an investment in the wrong person.

MAYDAY applies the lense to candidates by completing in-depth assessments to ensure they have not only the right skills but the right attitude to succeed in your business…

Ultimately we can save you time and money by helping you make smarter, safer investments in your workforce.

Get in touch today for more information