Strategic Discipline Blog

What’s it cost your company in terms of hard costs when you hire the wrong person?

Two weeks ago in a leadership weekly meeting one of my clients  examined these costs using The Topgrading Calculators available on the Topgrading website.  This company has two locations and is planning to expand in the future.  One of their 3-5 year priorities recognized the need to get their systems aligned in order to make sure when expanding they can have seamless consistent practices throughout their organization.  Hiring and recruiting are essential to this process of expansion.  Their satellite location is presently not meeting the same standard of excellence in hiring standards as their corporate office achieves.  This needs to be corrected. 

We went through the exercise steps.  Each step provided an estimated total for what the mistake cost.  There was complete agreement that the hiring mistake had cost them a considerable amount.

Here’s some of the numbers from Topgrading cost of mis-hire calculator:

Total Hiring Cost                                                                                                     $350

• Recruitment/search fees (Was there a guarantee and if so, was money recovered?) 

• Outside testing, interviewing, record checking, physical exam

• HR department time and administrative costs (for all candidates)

• Travel costs (for all candidates, spouses, other executives traveling to meet candidate)

• Time/expenses of non HR people (all candidates)

• Relocation (moving household goods, purchasing house for candidate)

Compensation                                                                                                         $9000

• Base Salary Multiplied By The Number of Years Employed

• Bonuses (“signing,” performance, etc.) for all years

• Stock options (realized for all years), benefits (insurance, 401k, etc.), car, clubs

Maintaining Person In the Job                                                                                  $2000

• Administrative assistant for all years

• Office “rental” (incl. electricity, etc.) for all years

• Furniture, computer, equipment, travel for all years

• Training

• Other "maintaining" costs

Total Severance                                                                                                      $1500

• Severance fee (salary, benefits, use of office), lawyer fees

• Outplacement counseling fee

• Costs in lawsuits caused by the person (EEOC, harassment, EPA, OSHA, etc.)

• Administrative costs in separation, wasted time of people in separation

Mistakes, Failures and Missed Opportunities                                                              $0

• Examples: Value of a key customer who was lost or driven away, value of impaired customer loyalty, the launch of three “dog” products

Disruption                                                                                                              $2500

• Costs of inefficiency in the organization, lower morale, lower productivity, impaired teamwork

Other                                                                                                                     $0

• Anything else that is unique to your company or organization that represents a cost associated with mis-hiring

Estimated value of Contributions                                                                              $0

• Even if a $50,000 per year store manager drove away customers and stole $1M, perhaps he or she contributed something. For example: Possibly the person hired five excellent employees or came up with a merchandising idea worth $500K per year to the organization's bottom line.

Wasted Hours                                                                                                             20

• Number of additional hours you and others spent dealing with mis-hire’s weak points — patching things up with customers, etc.

Percent of People Hired Who Turned out to be A Players:                                          0

Based on the data entered above, your organization would typically incur a Net Cost of $15,350.00 and waste 20 hours for each mis-hired employee.

This person only worked for the company about 2 months.  He was frequently late and/or absent.  He required a great deal of time and energy for the manger to train. Then they constantly needed a replacement person for him when he didn’t come to work as required.  After looking at the numbers I believe the team possibly under estimated on some and overestimated on others. Errors on either side probably negate each other, resulting in the true cost of this mis-hire being north of $15K. 

Topgrading is not an inexpensive proposition in terms of your investment in time and capital.  The latter (capital) is the least of your expense.  Time to train adapt to make sure you are disciplined in following the practice is the greatest investment.  Frankly it’s why few put the time and energy into it.  It’s easier to continue to practice hiring and recruiting the way you’ve been than to spend hours and months fixing a hiring and recruiting system that doesn’t work.  In the meantime you make lots of mistakes never recognizing the extreme costs that the business experiences.  Perhaps you disagree with the cost of making a hiring a mistake?

Remember too that a mis-hire’s wake has many subtle ripples that often don’t emerge until months later.  A poor performer drags down the morale and commitment of good employees.  One bad apple can begin to spoil others in your organization.   It’s another reason why Jim Collins People Rules: When you know you need to make a people change: ACT, makes so much sense.  How long do you want one or several people in your organization to disrupt and negatively influence performance? 

Have you made a mistake hiring?  How recent was it?  Do you know how much it really cost you?  If you’re courageous enough, complete the cost of mis-hire calculator on Topgrading.com.  The steps to ensure you hire correctly in the future not only avoid expenses, hiring the right people improves morale and contributes to the growth and performance of your team.  Make sure you’re getting the right people on the bus and invest in Topgrading hiring practices for your business.