The Cost of a Hiring Mistake

October 1, 2018

Many companies' mission statements include a portion that declares something along the lines of "employees are our greatest assets!" Yet those same companies devote more time to selecting and purchasing a piece of equipment than they do to hiring the right person for the right job.  Since there is no line item on our financial statements to indicate the cost of a hiring mistake, we live with the illusion that hiring the wrong person doesn't cost anything.

You won't find a way to track the cost of losing the right employees - the ones who are tired of dealing with incompetent coworkers.  Most businesses have no way to account for the cost of customers who leave because they are tired of dealing with systems that don't work.  But you must recognize that the bottom line will be severely impacted.  The quality of your staff, the products or services you produce, the safety in your workplace, and relationships with your customers may already be irrevocably harmed.  These are expenses that few businesses can afford.  Remember, what you don't know can cost you!

The challenge and cost of turnover is one of the most discussed, most frustrating, and most misunderstood problems businesses face.  The following quote is a fact that should not be forgotten:

"If you do not know what turnover is costing you, many authorities agree that you can come surprisingly close to the cost of a single turnover incident by simply multiplying the annual salary for the position by 2.5 -- that will cover productivity loss, recruiting, and hiring cost, training cost, liability, unemployment, and the other 101 hidden costs that we usually try not to think of, or may not be aware of, when we lose an employee."

The following is a list which provides categories and possible cost factors when figuring cost of turnover:

Selections Costs:

  • Advertising; Screening; Travel; Phone; Other
  • Other Pre-Hiring Cost Factors
  • Testing; Record Checking; Reference Checking; Drug Screening; Interviewers Time; Other

Support Costs:

  • New Hire Orientation; Safety Training; Uniform; Equipment; Business cards; Professional fees/dues; Supervisors time; Other support cost factors (other training, payroll/benefits, accounting, administrative);
  • Unemployment and workers compensation; Litigation; Severance; COBRA)

Intangible Costs

  • Lost morale and team productivity; Adverse effects on quality; Damage to customer and/or supplier relationships; Loss of business;

If you don't have a worksheet for calculating the cost of turnover your accountant can most likely help you with this. If you do have one you might take a few minutes and make sure you have all the above costs incorporated in your form.  Knowing what your costs are in every facet of your business goes a long way to making sure you can be profitable.

Adapted from: Jeanette L. Seibly, Hiring Amazing Employees, 2006

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