The Cost Of Not Hiring Vs. The Cost Of A Bad Hire
Plenty of research has examined the cost of hiring the wrong person–making a bad hiring decision that you ultimately pay for. But should recruiters compare this figure to the cost of not hiring? What if a fear of hiring the wrong candidate leads you to not fill a position for such a long time that your company suffers? Most HR professionals have to balance the cost of not hiring versus hiring a bad employee at some point. The question is, which should be a greater concern?
CareerBuilder asked HR professionals which is more costly–a bad hire or an open position? Just over half, 57% said a bad hire was far more costly, and another 16% said bad hires were somewhat more costly. Only 3% of respondents would call an open position more expensive than a bad hire. Yet the pressure to hire someone, anyone, is often too great for recruiters to ignore.
Fewer staff shouldering a larger workload can lead to decreases in productivity and competitiveness. So many times, the cost of not hiring is more apparent, and overshadows the costs that will later come from a bad hire. In this post we’ll examine how talent acquisition leaders can calculate both costs, and look into which is the better hiring route to take.
The Cost of Not Hiring
How can recruiters measure the cost of not hiring someone? Think of it as the opportunity cost your company has to pay when there’s no one to fill an empty position. Other team members will likely bear the burden of that open role, extending the amount of time it takes them to complete their normal work.
The additional stress of a smaller team can add up over time to reduce productivity and push back deadlines. The service your staff provides could drop and customers might take their business elsewhere. And the employees you’re relying on to cover the open position may build up resentment towards the company, or even start looking for a new job.
These opportunity costs can be hard to quantify, especially if not everyone at your business is considered revenue-generating. But it will be helpful to at least estimate some of these costs. Here’s one method to find the costs of not filling an open position:
- Start with Total Annual Revenue Generated per Employee = Annual Company Revenue / Number of Revenue Generating Employees
- Calculate Daily Revenue per Employee = Annual Revenue Generated by Employee / 365 days (or total number of days per year spend generating revenue)
- Determine Revenue Lost per Unfilled Job = Daily Revenue per Employee X Average Days Positions Unfilled
- Find Total Revenue Lost for All Open Jobs = Revenue Lost per Unfilled Job X Number of Open Jobs
Be sure to set a time period over which you’ll calculate this metric, and stay consistent. You can then set your own internal benchmarks after several periods have passed. Industry-wide benchmarks for the cost of not hiring are hard to come by, but then they may not be very useful. C-suite executives may be more impressed by the cost, or lack thereof, that not hiring brings to their own company.
The Cost of a Bad Hire
A bad hire is pretty self explanatory–someone you hired who turned out to be wrong for the position. The true sign of a bad hire is decision to replace the person in question. This may come from an unacceptable quality of work or attitude, an inability to work with their broader team, failure to follow directions or meet deadlines, or negative experiences reported by customers.
Some of the many factors you can consider when calculating the cost of a bad hire: the time to fill before the bad hire, any time and resources spent sourcing, hiring, and onboarding the bad hire, salary and benefits paid to the bad hire, productivity lost due to the bad hire, any negative impact on other employees or clients, the time to fill after deciding to replace the bad hire, additional time and resources spent sourcing, hiring, and onboarding the bad hire’s replacement.
That’s a pretty daunting list of figures to gather, and each company will need to decide which factors they want to include in the cost of a bad hire. Here are some of the components you can add up as a starting point:
- Cost of time and resources spent recruiting and training the bad hire
- Cost of lost productivity before, during and after the bad hire
- Negative impact on existing employees
- Negative impact on customers
- Any wages paid to bad hire
- Cost of time and resources spent recruiting and training a replacement for bad hire
- = Total Cost of Bad Hire
HR leaders will also need to define the methods used to calculate each factor. As with the cost of not hiring, a standard time period over which this metric is measured should be set at the beginning. And after several periods have transpired, you can start setting internal benchmarks upon which to improve.
For a general comparison, the U.S. Department of Labor pegs the average cost of a bad hire at around 30% of that person’s potential income in the first year. And 27% of U.S. employers responding to a CareerBuilder survey estimate a bad hire costs them more than $50,000.
What’s the Better Choice?
Recruiters could simply calculate both metrics and see which is the least costly option. But we know simple figures don’t always paint a full picture. It’s also important to consider metrics like time to fill, cost per hire, and quality of hire. If your talent acquisition strategy prioritizes quality of hire over things like time to fill, an elevated cost of not hiring might be acceptable when compared to the cost of a bad hire.
Recruiters also need to think about the specific positions they’re trying to fill. A bad hire in an essential role may not have the same impact as a bad hire in an ancillary department. But then the same could be argued for leaving a critical position open versus an unfilled secondary role. There are countless examples of the negative impact of both a bad hire and an unfilled job.
Hiring managers will need to balance both the quantitative and qualitative costs of each, and ultimately explain their reasoning to the team. If you’re able to bring both costs down, maybe a few bad hires are worth the cost compared to not hiring anyone, and vice versa, depending on your company’s needs.
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