The True Cost of a Bad Hire

Bringing the wrong candidate on board can be a costly mistake—and not just in financial terms. The good news: There's plenty you can do to help prevent such problems.

By Anne Stuart

There's probably no bigger human-resources headache than dealing with the fallout from a hiring mistake. Whether you're talking about a CEO, a call-center director, a marketing executive or a manufacturing plant manager, the bottom line is the same: If you pick the wrong person, it's going to cost you big time.

How big? In his book "45 Effective Ways for Hiring Smart" (Ten Speed Press, 2003), organizational consultant Pierre Mornell says replacing a bad hire typically costs about two-and-a-half times the person's salary—and that's if the employer acts quickly (within the employee's first six months on the job). Other HR experts say that for certain types of jobs—"C"-level executives, highly skilled specialists and people in key sales or customer-relations roles—the ultimate loss from a bad hiring decision may be several times higher.

Some of those costs are easy to calculate: search, recruiting and advertising costs; relocation and training expenses; actual salary and benefits. Of course, the company will have to pay all or most of those costs again to find a replacement. Other post-departure expenses may include severance and unemployment pay, temporary staffing fees and—in the event that the ex-employee files a lawsuit—substantial legal fees.

Other losses are less obvious but no less real--for instance, HR and manager time spent interviewing not just the person who got the job, but everyone else who applied for it; supervisor time spent training, coaching and evaluating the new employee. Still other costs are even harder to quantify: lost productivity missed or botched opportunities, damage to customer relationships and the bad hire's impact on co-worker morale. And the longer the saga drags on—typically anywhere from six to 12 months from hire to departure--the more the company
loses.

(For a ballpark estimate of just how much the wrong decision might cost your company, try the online Bad Hire Calculator offered by Automatic Data Processing (ADP) Inc., the payroll-services company. The calculator is free and easy to use—just go www.adpselect-info.com/badhirecalcultor.html and enter the dollar and time estimates where indicated and watch the bottom line add up.)

The best way to beat those costs is, of course, to make the right hiring decision in the first place. Following are some tried-and-true tips for accomplishing that goal:

Slow down. Despite the current shaky U.S. economy, many industries are feeling the pinch as the oldest Baby Boomers—members of that enormous generation born between 1946 and 1964—reach retirement age and leave the work force. That exodus, which the U.S. Department of Labor predicts says will grow noticeably over the next several years, leaves employers competing over a much smaller pool of younger applicants. Not surprisingly, that situation may tempt HR managers to fast-track key hiring decisions.

But that strategy can easily backfire. Sure, no one wants see a promising candidate get away—especially to a competitor. But experts say the potential harm associated with making a bad hire is a far more serious threat. (As several consultants have put it: 'No hire' is better than a 'bad hire.'). Resist the temptation to make a quick call and, ultimately, you're more likely to make the
right call.

Avoid ambiguity. An unclear, incomplete or misleading job description will only pave the road to a bad job match. If recruiters and HR representatives don't have complete accurate details about the job in question, they'll be hard-pressed to find the right person to fill it. And candidates who receive sketchy job descriptions will probably develop fuzzy or distorted ideas about what's expected of them; the luckless person who wins the position is likely to stumble badly right out of the gate.

So write a clear, thorough description for every available position. Ask current or past job-holders what factors you should emphasize—perhaps even what they wish they had known before they were hired. Then run descriptions past supervisors to make sure they're correct and up to date.

Interview wisely. Don't rush this process, either. Avoid using a standard interview template; instead, customize your questions for each position.

Encourage applicants to go beyond simply listing their qualifications. Press them for detailed anecdotes that illustrate, for instance, how they approach problem-solving or manage complex projects or handle particularly picky customers. Or ask them to describe how they'd handle scenarios that commonly crop up on the job. Either way, you'll get a glimpse of how each candidate might perform in your workplace.

Consider letting existing team members interview candidates as well; urge them to provide frank feedback about their impressions. One caveat: Less-experienced employees often have no clue about conducting effective job interviews, so it's well worth investing in training to make sure everyone's asking the right kinds of questions.

Finally, remember to ask candidates whether they've got questions for you. What they ask can provide valuable clues about how they think, what they consider important and how well they're likely to fit into the job in question—and to your company as a whole.

Check carefully. Let's face it: When you ask candidates for references, they'll provide you with names of people carefully chosen to provide glowing testimonials. But you can take a few simple steps to obtain a more balanced picture that might help prevent making a hiring mistake.

First, make sure that a candidate's reference list includes at least one past supervisor (not just friends, colleagues, HR representatives, distant department managers or others). Then arrange to talk with that supervisor by phone. Don't settle for a written reference; you're much more likely to get an honest assessment in a spontaneous conversation.

In talking to the supervisor, you'll get the most mileage from the same types of questions that you asked the candidate—specifically, those probing for specific examples of how the person has handled particular situations in the past.

It's no secret that most supervisors worry that making negative statements about a past employee could result in a lawsuit. Many people are more comfortable dealing with numbers than with words, so you may be able to allay those fears by developing a list of qualifications for the job, then asking the supervisor to simply rate the candidate on a scale of 1-10 for each. If you get a lot of "3s" and "4s" – or a lot of hesitation about answering at all—that may tell you all you need to know.

Anne Stuart is a Boston-based business journalist who writes frequently about workplace and career issues. Contact her at annestuartnews@yahoo.com

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