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The True Cost of a Bad Hire

Jul 14

If there is one constant in HR and Recruiting it is the fact that no one will ever agree on how much a bad hire costs an organization!  Never!  It doesn’t matter how much time you put into coming up with some algorithm, how much research to back up your numbers, it’s still going to be 90% subjective/soft numbers at best.

This is the main reason executives in our organizations think the majority of HR/Talent Pros in the world don’t get business!   We come to them with stuff like this:

“We need to reduce turnover because of Engineer who leaves us, costs the company $7,345,876.23!”

Then you go through a 73 slide PowerPoint deck showing how you came up with the calculations all the way down the parking meter expense during the interview, and when you’re done, no one believes you’re even close to an actual number.

The gang over at National Business Research Institute put together a pretty good infographic proving my point – take a look:

NBRI - The Cost of a Bad Hire Infographic

97%+ of the ‘lost’ cost is from “Training” and “Productivity Loss” and those, my friends, are considered very subjective measures in almost all organizations.  What that says is, ‘Oh, Jimmy isn’t working out – fire him – and because he wasn’t working out we lost ‘X’ percent of productivity over any other possible replacement (which in itself is a whole other leap)’.  And, we lost 100% of training we put into Jimmy because he is now not here.  Which again is subjective, since most training isn’t one-on-one, and resources used to train are almost always not used just on one person, etc.

What that says is, ‘Oh, Jimmy isn’t working out – fire him – and because he wasn’t working out we lost ‘X’ percent of productivity over any other possible replacement (which in itself is a whole other leap)’.  And, we lost 100% of training we put into Jimmy because he is now not here.  Which again is subjective, since most training isn’t one-on-one, and resources used to train are almost always not used just on one person, etc.

So, here’s a better way to figure out the cost of a bad hire:

1. Ask your head of finance or accounting what they think it costs? “Ballpark it for me?”  $10K? Sounds great! We’ll use $10K.

2. Use $10K as your cost of bad hires.

Your reality, HR’s Reality, is it really doesn’t matter what the number is.  Only that the powers that be in your organization all agree on the number. Stop wasting your time trying to come up with a better number, just come up with a number that those signing the check agree is probably legit.

2 Comment to “The True Cost of a Bad Hire”

  1. A financial services firm was replacing 200 customer service reps a year with an average annual salary of $48,000. After doing the calculations, they were able to show that the full cost of that turnover was about $72,000 per employee, or $14.4 million per year or 150% of annual salary. They were flabbergasted. That’s a big number even for a 2,500 employee company. By the way, their Cost-To-Hire was less than $10,000 per employee.

    I created the workbook because I could not find a method that was anything but rudimentary. Bill Bliss’ article Cost of Turnover was the most complete list of items that went into the cost of turnover but it was all words, no calculations. With Bill’s words and my Excel skills and Dr. John Sullivan’s critique we created the workbook so that employers could know their cost of turnover.

    When we apply the tool to valued executive personnel, for example, the results can get really striking. The reason is that key personnel have roles where things like relationships, institutional knowledge and talent for the job can have considerable value. We’re dealing with situations where a question like, “What would it cost us if Mark or Sally were hit by a bus?” elicits worried looks and responses like “I have no idea. Boy that would be a real problem.”
    Analyze those types of situations carefully, and you’ll find Cost-To-Replace can run into the millions. We know of one situation where an executive team calculated the replacement cost of a particular key person at $50 million. After learning this, the CEO wrote him a bonus check for $6 million. Do you think any recruiter can make him an offer he can’t refuse?

    Jul 14, 2016
  2. In the late 1990s I was not convinced that the cost of replacing an employee was only 35% of annual salary, which we were using, let alone 25%. Therefore I searched the Internet for the most complete description of what costs go into replacing an employee. Unfortunately, I found many articles, all words but no costs and no formulas other than 0.25 x salary. 

Then I decided to create my own Excel workbook to help employers put a dollar cost to replacing employees. I went back to the text only resources and selected the most complete article I could find which was, “The Cost of Employee Turnover,” by Bill Bliss, who is an HR Consultant. I called Bill and asked him if he would like to collaborate on creating a comprehensive workbook for calculating the cost of employee turnover and he said, yes. 

My original idea was to give the workbook away but it took so much of my time and it is the best and most thorough method available that we decided to sell it instead. I was surprised by who purchased it such as; a major computer company, small to large employers. A company full of Ph.D. economists told me the workbook was the most complete method they could find for helping a client justify a 300% buyout provision of a former $125,000 per year executive of a fast food chain. They told me that the agreement reached was confidential but their client was very pleased with the outcome. 

I have copied a section of the workbook that lists each input in the workbook so you can get a feel of how comprehensive it is.

    Line EJ1 1 Company Name
    Line EJ1 2 User’s Name
    Line EJ1 3 User’s Title
    Line EJ1 4 Address
    Line EJ1 5 Address 2
    Line EJ1 6 City
    Line EJ1 7 State
    Line EJ1 8 Zip Code
    Line EJ1 9 Telephone Number
    Line EJ1 10 Fax Number
    Line EJ1 11 Email
    Line EJ2 1 Company Name
    Line EJ2 2 Contact’s Name
    Line EJ2 3 Contact’s Title
    Line EJ2 4 Contact’s Address
    Line EJ2 5 Contact’s Address 2
    Line EJ2 6 Contact’s City
    Line EJ2 7 Contact’s State
    Line EJ2 8 Contact’s Zip Code
    Line EJ2 9 Contact’s Telephone Number
    Line EJ2 10 Contact’s Fax Number
    Line EJ2 11 Contact’s Email
    Line EJ3 1 Job Title
    Line EJ3 2 Type 1 – Top Performer Weighting Factor
    Line EJ3 3 Type 2 – Average Performer Weighting Factor
    Line EJ3 4 Type 3 – Bottom Performer Weighting Factor
    Line EJ3 5 Performance Appraisal Rating for Type 1
    Line EJ3 6 Performance Appraisal Rating for Type 2
    Line EJ3 7 Performance Appraisal Rating for Type 3
    Line EJ3 8 Number of Type 1 employees that left
    Line EJ3 9 Number of Type 2 employees that left
    Line EJ3 10 Number of Type 3 employees that left
    Line SI0 Percent of salary to cover benefits)
    Line SI1 Hourly rate for vacant position
    Line SI2 Hourly rate for person who fills in
    Line SI3 Hourly rate for the vacant position’s supervisor
    Line SI4 Hourly rate for the vacant position’s manager
    Line SI5 Hourly rate for the vacant position’s director
    Line SI6 Hourly rate for the Internal Recruiter
    Line SI7 Hourly rate for Internal Recruiter’s Assistant
    Line SI8 Hourly rate for hiring department’s staff
    Line SI9 Hourly rate for orientation personnel
    Line SI10 Hourly rate for training personnel
    Line CIA1 Number of weeks the person fills-in
    Line CIA2 Lost productivity of fill in person ( 0.00 to 1.00 )
    Line CIA3 Cost of a formal exit interview
    Line CIA4 1 Hrs by mgr. to understand what work remains.
    Line CIA4 4 Hrs by mgr. to conduct separate exit interview.
    Line CIA5 1 Cost of training ee by company personnel
    Line CIA5 2 Cost of training ee by ext. programs…inst.
    Line CIA5 3 Licenses…certifications paid for by the company
    Line CIA6 1 Depart. Prod. lost because the person is leaving.
    Line CIA6 2 Cost of depart. staff discussing reactions….
    Line CIA6 3 No. of weeks departing ee has lower perf.
    Line CIA6 5 Departing employees’ lower perf. (0.0 to 1.0)
    Line CIA6 7 No. of ees who go with departing ee
    Line CIA6 8 Average cost of losing these departing yes
    Line CIA6 10 Dollar cost of disrupting the team
    Line CIA7 1 Cost of severance package
    Line CIA7 2 Cost of benefits provided to employee
    Line CIA8 2 Value of lost knowledge, skills and contacts
    Line CIA8 4 Years of service
    Line CIA8 5 Annual premium (0 to 1.0)
    Line CIA9 1 Increased unemployment insurance premiums
    Line CIA9 2 Cost of time spent to prepare for unmet. hearing
    Line CIA9 3 Cost of third party to process unmet. claim
    Line CIA10 1 Cost of lost customers
    Line CIA10 2 Cost to retain the customers that want to leave
    Line CIA11 2 Number of weeks the position stays vacant
    Line CIB1 1 Advertising (classifieds and display ads)
    Line CIB1 3 Agency fee (@ 20 – 30% of annual compensation)
    Line CIB1 5 Employee referral …
    Line CIB1 6 Internet posting (e.g., $300 – $500 per listing.)
    Line CIB1 7 Number of Internet postings
    Line CIB1 9 Sign-on bonus
    Line CIB1 10 Relocation package
    Line CIB2 2 Internal recruiter’s time (min. of 30 to 100+ hrs…)
    Line CIB3 2 Recruiter’s assistant’s time (a minimum of 20 hours)
    Line CIB4 1 Supervisor’s hours
    Line CIB4 4 Manager’s hours
    Line CIB4 7 Director’s hours
    Line CIB4 10 All Other staff hours
    Line CIB5 1 Admin. cost/resume (handling/processing/respndng)
    Line CIB5 2 Average number of resumes processed
    Line CIB6 2 Hours spent interviewing internal candidates
    Line CIB6 5 Hours by internal candidates in interviewing
    Line CIB7 1 Drug screen
    Line CIB7 2 Educational verification
    Line CIB7 3 Criminal background checks
    Line CIB7 4 Other reference checks
    Line CIB7 6 Number per position filled…
    Line CIB8 1 Skills test
    Line CIB8 2 Abilities test
    Line CIB8 3 Aptitude test
    Line CIB8 4 Attitude test
    Line CIB8 5 Values test
    Line CIB8 6 Behavior tests
    Line CIB8 8 Number of applicants tested per position filled
    Line CIB8 10 Job Fit Assessment…
    Line CIC1 2 Hours new employee spends in orientation
    Line CIC1 5 Hours spent by orientation personnel
    Line CIC1 7 Orientation materials
    Line CIC2 1 Department training development and delivery
    Line CIC2 3 Hours in training by new employee
    Line CIC3 2 Hours of training (design and delivery)
    Line CIC4 1 Training materials
    Line CIC4 2 Computer costs
    Line CIC4 3 Other equipment costs
    Line CIC5 2 Hours by supervisor
    Line CID1 5 Weeks at a 75% lost rate (Use 2 , 3 or 4)
    Line CID2 5 Weeks at 50% loss rate (Use 1 to 8)
    Line CID3 5 Weeks at 25% loss rate (Use 1 to 8)
    Line CID4 2 Hours by supervisor (over a 5 month period)
    Line CID4 5 Total hours of coworkers (over a 5 month period)
    Line CID5 Cost of mistakes by new ee…
    Line CID6 Cost of lost management time (opportunity costs)
    Line CID7 Non-completion or delivery of a critical project…
    Line CID8 2 Manager’s lost productivity (hrs) by losing key staffer
    Line CID8 5 Director’s lost productivity (hrs) by losing key staffer
    Line CIE1 1 To put the person on the payroll
    Line CIE1 2 To secure computer and security passwords
    Line CIE1 3 Identification and business cards
    Line CIE1 4 Internal and external publicity announcements
    Line CIE1 5 Tel. hookups and establishing email accounts
    Line CIE1 6 Establishing credit card accounts
    Line CIE1 7 Leasing equipment (…cell phones, automobiles, etc.)
    Line CIE2 2 Hours Manager needs to develop trust, etc.
    Line CIF1 3 Company Revenue (budgeted)
    Line CIF1 4 Number of sales people
    Line CIF1 6 Weeks in budget
    Line CIF1 10 Weeks at a 25% Productivity Rate (1, 2 , 3, 4 or more)
    Line CIF1 14 Weeks at a 50% Productivity Rate (Use 1 to 8 or more)
    Line CIF1 18 Weeks at a 75% Productivity Rate (Use 1 to 8 or more)
    Line CIF2 5 Number of employees
    Line CIF2 8 Weeks position is vacant
    Line CIF3 2 Profits as a percent of sales
    Line CIG1 Losing a person in a key or critical job.
    Line CIG2 Competitors seeker more employees or customers.
    Line CIG3 Competitor may learn business secrets and ideas.
    Line CIG4 “We don’t care” so they and look for new supplier.
    Line CIG5 “We are going down hill…”

    Jul 14, 2016

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