The full cost of every hiring mistake is $400 thousand!
Few companies calculate the ROI of the effectiveness of their different sourcing channels but those that do discover referrals are the best with job boards generating more mistakes. And the cost of these mistakes is staggering wiping away the benefits of lower cost and speedier hiring.
While it’s hard to believe that a single hiring mistake could cost a company $400 thousand, it’s not so hard to believe when looking at this table showing the incremental profit contribution of employees at these well-known companies. The idea behind this table is that it shows the full financial and business impact a person has on a company, rather than just considering the person’s compensation package.
For example, using Sample Company statistics, if a new hire leaves in the first year, not only is the average $250 thousand profit contribution lost (the yellow highlight) but also the person’s total compensation and benefit package which is at least $150 thousand for most staff level professionals. That’s a combined $400 thousand hiring mistake!
The Low figure (in blue) is the contribution of the bottom-third of people who stay, and the High figure (green highlight) represents the total contribution of those in the top-third. This additional $100 thousand per hire is a good way to use ROI analysis to justify new hiring projects or where to allocate money spent on sourcing different channels.
While these are averages only across a company’s total workforce, they’re pretty much on target for staff level professional positions. Of course, for managers and executives the impact of any hiring mistakes and turnover would be far greater and less so for more junior positions. Nonetheless, it’s clear that hiring mistakes are very costly when based on the full contribution these people can make on the company’s financial performance.
Accelerating this turnover problem is the “Great Resignation.” According to the latest report from the U.S. Department of Labor the current monthly quit rate of 2.9% is equivalent to a 33% turnover rate on an annual basis. This means that there’s a good chance one-third of all new hires are likely to quit in the first year unless something is done to focus on retention during the hiring process rather than just hoping someone works out.
To get a sense of the magnitude of the cost of the “Great Resignation” induced turnover, multiply one-third of your company’s total new hires for 2022 by $400 thousand. It’s over $13 million if a company is hiring 100 people and one-third leave during the first year (33 x $400K = $13.2 million).
The total cost of hiring mistakes and turnover is staggering and begs for a solution.
Secret to Better Hiring Decisions: Hire and Retain in Parallel, Not in Sequence
Given that hiring mistakes are bad news all around and far worse when the possibility of turnover is added into the mix, more needs to be done to alleviate the problem. Hiring faster isn’t the answer since this just exacerbates the turnover problem. One way might be to embed the long-term needs of the company and the candidate directly into the interviewing process and decision-making process by asking if the candidate would take the job if it weren’t for the compensation package.
Forget the money. Do you really want this job?
Here’s one idea to ponder.
In my early recruiting days, I committed to my clients that I would guarantee a candidate’s performance for a full year if they agreed to define work as a series of performance objectives rather than a list of skills and experiences. During the interview we would dig deep into a candidate’s major accomplishments to ensure the person was both competent and motivated to do this work and that the person fit with the manager’s style and company’s culture and pace. From the candidate’s perspective it was important that she/he saw the job as the one offering the best long-term career trajectory rather than just the best compensation package. This dual process is now referred to as Win-Win Hiring – hiring for the anniversary date, not the start date. Underlying it is the Performance-based Hiring process described in Hire with Your Head (4th edition, Wiley, 2021).
By focusing and measuring performance this way there was another surprising benefit: the talent pool was opened to a broader group of high-potential and more diverse people who could do the work at high levels but who had a different mix of skills, experiences and competencies than listed on the typical job description. Normally these people would have been excluded from consideration early in the process, but with this new approach they were welcomed. (Here’s a video online summary on how to do this.)
While avoiding the $400 thousand loss per hire is a big deal, this is actually less than half of it. The bigger half is that by hiring for performance AND retention concurrently you gain an additional $300 thousand contribution every subsequent year by hiring people who represent the top-third. This is shown as the green highlight in the table above.
Bottomline, the cost of turnover is staggering and the ROI of stopping it is insignificant. You’ll be able to calculate the ROI of hiring the A-team using this financial calculator. Just as important, by using this Quality of Hire Talent Scorecard you’ll be able to predict those people likely to quit or underperform in this first year by assessing the factors that best predict performance, fit and motivation to excel.
By recognizing the impact people can make rather than just their cost you treat the hiring decision as an investment rather than an expense. And quite frankly, this is how important each one is.