Leadership Hiring: The Cost of a Bad Hire & How to Prevent it

Every HR professional who is connected to talent acquisition knows that cost per hire and time to hire are two key metrics used to measure the efficiency of the recruitment process, but it only represents a fraction of the potential true cost of making a bad hire. In the United States, the current cost per hire is roughly $4500 and includes the direct costs (ex. external recruiters, job boards, aptitude and “fit” tests, background checks, etc.) and indirect costs (ex. recruiter and hiring manager salaries) associated with acquiring the new employee.  It does not account for the costs associated with the training and development needed to bring the new employee up to speed. This cost is relatively small at $1252 per employee in 2021, but a cost, nonetheless. What companies often fail to do is to consider the cost of the vacancy.  The need for speed to hire is real right now and many companies are opting for faster and acquisition strategies, which often remove pre-employment testing.  I would argue that this strategy can be more costly than a more in-depth assessment of candidates because it results in a longer time to hire and it becomes even more critical when recruiting for management roles.

In 2019, Gallup reported that lost productivity alone costs US businesses between $960 billion to $1.2 trillion annually. That equates to an average cost of $196,721 annually in lost productivity for a business. Using this figure, and assuming the single manager is 100% responsible for the full cost of lost productivity (which they aren’t), the vacancy is costing as much as $900 / per day, or roughly $27,000 if filled in 45 days with the right candidate. If you want to move quickly and fill in, say 15 days, this cost is reduced to $13,500.

The Cost of a Bad Hire

But what would really cost the company to fill the manager role in those 15 days with an ill-fitting or improperly skilled candidate?  Managers account for up to 70% of an employee’s experience at the company, engagement at work, and influences team performance, productivity, and turnover.  A Harvard study found the annual revenue a productive employee brings to an employer is roughly three times the employee’s base salary. The average salary in the US is $51,916, so if the ill-fitting or unskilled manager supervises just three employees at this salary, the cost of having filled the role with a poor manager could cost as much as almost $360,000 annually in lost revenue.  The cost goes up if one or more of those employees vacates their roles. A poor manager will need additional training and development, such as coaching, as well.  The cost to coach a poor-performing manager can run, on average, $25,000 for a 6-month engagement.  Given true behavior change can take over 12 months, you are looking at a minimum cost of $50,000.  The cost to fill a management role who supervises a small team of three employees with the wrong candidate could cost a company upwards of $410,000 a year in lost revenue. 

Now, let’s do the math and answer the question, is it more costly to hire the wrong candidate quickly or the right candidate slowly?  The annual impact on revenue and cost to hire and onboard the new manager, or the minimum cost of hiring the wrong candidate quickly, in those 15 business days, is roughly $380,000, at best. This does not include the cost of additional development to overcome their deficiencies once discovered. If you slow the process down and take the full 45 days to hire the right candidate, the cost goes down to as little as $32,750.  Even if we add back in half of the cost of lost productivity to account for a 6-month learning curve to get the three team members performing to expectation, the cost is still just over $212,000. 

Slow down to drive down the cost and increase the value of the managers hired.

On average, corporate job postings get roughly 250 applicants. Once these 250 are reviewed, a hiring manager usually interviews the top 6 – 10 candidates and these candidates are typically selected based on the resume screening alone.  Recruiters spend an average of 6 seconds reviewing an applicant’s resume. This quick review is a reality, but it certainly cannot be counted on to produce 6 – 10 top talent candidates.  Even if recruiters spent 6 minutes reviewing a single resume, this process alone would not yield the true top talent candidates. One of the worst ways to know if you are hiring the right candidate is through a resume review and interview.

Given roughly 50% of candidates are eliminated after the first interview, this equates to a hiring manager wasting at least 3-5 hours interviewing the wrong candidates. If time is money, then this is more money taken away from the company’s bottom line.

Assessing Manager Skills

One of the best ways to know if you are hiring the right person for a management role is through the assessment of abilities and work style characteristics.  These tests result in improved quality of the candidates hiring managers do spend their time interviewing. Research indicates that successful managers possess a combination of talents, interests, and characteristics such as leadership orientation, judgment and reasoning abilities, interpersonal skills, ability to plan and organize, tolerance for pressure, interest in motivating/coaching others, initiative, and result orientation. Pre-employment testing can tell recruiters and hiring managers which candidates possess these abilities and characteristics and which ones don’t, so time can be spent targeting and interviewing only those candidates who are truly a fit for the role and who can be expected to manage successfully. 

PSP Metrics has been at the forefront of science-backed employee assessments and measurement systems for over 75 years. Our mission has always been to help give you a competitive business advantage through your company’s most valuable resource — your people.

Dr. Nicole Scott Headshot

Dr. Nicole Scott

Professional Talent Development Services

Dr. Nicole C. Scott is a Principal Psychologist at PSP Metrics. Her expertise is in talent gap analysis and development, individual performance development, team development, employee engagement, DEI, and coaching (individual, team, and group), with a deep expertise in job evaluation, competency modeling, succession planning, and both high potential mid-level leader development and frontline worker career development programs. Dr. Scott can be contacted at: nscott@pspmetrics.com or via LinkedIn.

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