April 4, 2017

A bad hire can cost you $27,000

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How much does a bad hire cost?

If you’re a human who hires other humans, you have probably made some pretty regrettable hires. It’s even possible that they leap to mind more readily than the great hires you’ve made. These folks aren’t necessarily bad people, just catastrophic mismatches for the culture and values of your organization. Hiring them was a memorably bad experience. You’re not alone. Most of us are queasily familiar with the sinking feeling that is the first consequence of a bad hire. But can we put a dollar value on the cost of a bad hire? With the help of our fabulous staff sociologist Liz Kofman, I did a little digging, and it turns out that we can.

20-46% of hires are bad

First we need to figure out what percentage of hires are bad. I turned up two reputable surveys exploring this question. One, from CEB Global in 2013, polled “thousands of hiring managers globally.” It found that they believe 20% of team members shouldn’t have been hired in the first place. Even more damningly, LeadershipIQ’s 2005 study of 5,247 hiring managers from 312 organizations suggested that 46% of new hires will fail within 18 months.

LeadershipIQ also looked at the reasons why new hires fail. Counterintuitively, most failed hires have all the technical skills they need to succeed. What they lacked was the ability to accept feedback (26%), the ability to understand and manage emotions (23%), motivation to excel (17%), or the right temperament for the job (16%). “Hard” skills, it turns out, are relatively easy to find. “Soft” skills are hard.

Cost of a bad hire: $26,830 to replace a $100,000 employee

Back to the main question: exactly how much money are we dropping on the floor? Here, Liz pointed me to a couple of Washington, DC think-tanks, the Center for Law and Social Policy (CLASP) and the Center for Economic and Policy Research (CEPR). Back in 2015, these bad boys put their heads together to build a kickass Turnover Calculator. It’s designed to add up all the direct and indirect expenses incurred by making a bad hire.

It’s sobering stuff. CLASP-CEPR covers both hourly and salaried workers. I focused on salaried staff. I plugged in $100,000 as a sake-of-the-argument salary. Sure, that’s excellent money in most of the country, but it’s only a foot in the door in the major population centers. The calculator helpfully provides defaults for most of the other costs (advertising, agency fees, travel, time spent screening, selecting, hiring and running background checks, and so on.) I went ahead and accepted those defaults, and came up with a startling figure. CLASP-CEPR calculates that replacing just one $100,000 employee costs $26,830.

you'd be surprised how much a bad hire can cost you!

Add 1000 employees, spend $5,366,000 on bad hires

It’s a startling number because of course, an organization of any scale isn’t going to be replacing just one bad hire. Google and Toyota are both companies that recently announced plans to add 1000 employees. If CEB Global is right, they will each need to replace 200 of these hires. (If LeadershipIQ is right, they will each need to replace 460.) Multiple 200 by $26,830, the cost of a bad hire, and Google and Toyota need to set aside $5,366,000.

As the old joke goes, a million here, a million there, pretty soon you’re talking about real money.

Structured interview processes reduce the risk of bad hires

Is there any way to plug this multi-million-dollar leaking pipeline? The good news is: there is.  82% of the managers in the LeadershipIQ study reported that in hindsight, interviews with failed candidates yielded clues that they wouldn’t work out. The trouble was that the hiring managers were either focused on other things, under time constraints, or reluctant to trust their hunches. Despite warning signs, the problematic hire was made.

These findings parallel decades of academic research on person-organization fit. This research is best summarized in the book “What Works,” by  Harvard professor of public policy Iris Bohnet. Bohnet writes:

Investing in structured interviews pays. What’s more, it is easy and cheap. Here is advice I urge everyone to embrace: plan ahead, use a checklist to structure interviews and stick to it, and evaluate candidates in real time.

It’s important to remember that structured interviews need to establish a candidate’s values, even more than their skills. Remember that the likeliest failure modes for new hires are lack of coachability and emotional intelligence, not lack of Javascript.

Ask behavioral questions – like “Tell me about how you worked effectively under pressure,” or “Have you ever made a mistake? How did you handle it?” These help interviewers gauge how someone makes a trade-off between collaboration and conscientiousness, or how they value honesty and transparency.

Bohnet describes the process as easy and cheap, but it is a little bit fiddly, like keeping track of your work-related expenses. For hiring managers, interviewers, and others who are involved in hiring only intermittently, Unitive’s software automates the administrative burden of structured interviewing. It’s a simple process change that could save your organization millions.