Hiring mistakes are not only aggravating, but also very expensive. Performance deficits, recruitment and training cost not only time, but money and nerves as well. How high the costs are can be calculated for each position. According to a study by Kienbaum, a mistake at the CEO level can cost up to three times the annual salary and add up to half a million euros. The executive search fees are included in this amount. As recruiters both profit from and are the catalyst of employee turnover, these estimates should be viewed with a grain of salt.
In less paid positions, however, the estimates differ sharply. Important factors here are: position, department, labor market situation and industry. There are quantifiable costs such as lost productivity, costs of advertisement, selection processes or litigation with former employees. The “psychological” costs are less quantifiable. These include demotivation amongst employees prior to termination, interruptions to knowledge transfer processes, the negative impact on the working atmosphere of the remaining workforce, and stress.
To be able to calculate, not just estimate, the costs incurred by a mis-hire, an American management professor and HR expert Wayne Cascio has developed a formula that serves as a basis for a cost calculator. This can calculate mis-hire costs for each position. To do this, we must first establish various “cost pools”:
Cost Before Separation
This includes costs that are caused by absenteeism, performance and motivational deficits before the employee actually leaves the company. In the case of “internal terminations” this process can drag on for years, whilst the costs add up. It is equally possible that an employee works to his full potential until their termination.
Direct Cost of Separation
This covers the costs of the seperation meeting, including the related work on the part of managers and human resource managers, as well as the work of the exiting employee. Other administrative costs are also incurred, such as in the payroll department, or for transfer protocols. In some cases further severance costs or court costs may occur if the seperation was not made by mutual consent…
This includes all costs incurred if a position can not be directly filled and a “blank space” is created. This creates the cost for overtime work of other employees who perform compensatory work, the cost for temporary or interim managers as well as the cost of lost assignments. However, these costs are minimized through the unpaid salary of the position.
This includes all costs associated with the filling of the position. Beginning with administrative costs for the preparation of a job profile, as well as the cost of posting the job on job sites or using print media, the cost of pre-screening and interviewing, testing, perhaps using an assessment center and travel costs for personal interviews.
This includes all costs associated with the training of new employees and the time needed to do this by human resource managers and other staff. Depending on the position and status there may be large variations within this pool. So the training of a skilled worker in a complex topic should take more time than the on-boarding of an assistant or auxiliary employee.
Performance Deficit until Fully Trained
This refers to the costs that are incurred whilst the employee is still in training and not able to work as productively as fully integrated employees. A Deloitte study concluded that it can take up to 24 months until a new employee is fully integrated into a company, its culture and its goals.
How to avoid mistakes when hiring
The loss of employees is undoubtedly connected with high costs. So how can we avoid these costs? There are generally two paradigms: Fit the man to the job or fit the job to the man.
1. Staff Selection:
The first variable that can be manipulated is the selection of staff. Candidates differ in their suitability. Only if there is a fit between the job requirements and the skills and interests of the candidate, there is a basis for a long-term and successful cooperation.
2. Working conditions:
If a department suffers from high turnover and fluctuation, despite professional and conscientious staff selection, it may be advisable to take a closer look at the working conditions.