How much does a bad hire cost?
It is not an easy question to answer. Usually we only take into account the recruiting costs, which, as we will see, are the upper part of the iceberg.
Let us take the hypothesis of departure of a young graduate hired at a compensation level of €70,000. Usually the recruited candidate will leave the company at the end of the probationary period, which is 4 months.
At the time of his/her departure, this employee will have cost the company:
€70,000 / 12 x 4 = +/- €23,333, or nearly €46,667 if we include charges and infrastructure costs (employers’ contributions, office, environment, miscellaneous expenses = coefficient ~ 1.8 to 2.2, according to location and profile)
That is without taking into account the operating loss. This « uncollected added value in relation to the investment made » can be estimated between 1.5 and 4 times the wage cost of an employee, depending on the activities and the share of personnel costs in EBITDA.
Let us take a factor of 2. The cost of the operating loss is quickly calculated and amounts to €93,333 (note: it can be argued that the operating loss is actually still higher, considering the time required to recruit the candidate, and the integration period of his/her successor).
We have already reached a total of €139,998!
In addition, there is the cost of the actual recruitment. Assuming that this cost amounts at least €10,000, we get to €149,998.
Lastly, we must not forget the productivity loss: a recent study has revealed that 52% of Human Resource Directors believe that unsuitable recruitments cause a decrease in productivity of the other employees. 27% also think that this has a negative impact on the morale of the teams.
This calculation is of course still rough and would need further investigation. However, it does have the merit of demonstrating that:
– unsuitable recruitment process can cause severe financial losses
– the recruitment cost, which is often considered to be high especially when the search is externalized toa search firm, is after all a minor part of the budget.
Obviously, the demonstration is still more meaningful if we take higher salary levels as a basis.
If the executive search industry manages to build trust with clients, meaning that, assignment after assignment, the industry demonstrates a high level of quality in the candidate search and in-depth evaluation, and by doing so reduces the risk of bad hire, the future should be shiny.
On the same subject, see also the article of UK in the October 2017 issue of the ECSSA Newsletter.