The REAL cost of hiring the wrong people.
The result of a ‘bad hire’ can have a negative financial impact on the business – but do you know how much?
In a survey of over 100 entrepreneurial business owners in South Africa, more than 80% of the respondents highlighted people-related issues as their biggest frustration. Things like cash flow, funding, technology and global markets did not feature as prominently as staff issues. Recruitment and retention of the right people are critical, especially for the small business owner!
Assume you have recently employed a sales consultant who is underperforming and does not ‘fit in’ with the team. After going through the relevant internal performance management process there is no alternative but to replace the underperformer. Consider the following costs:
- The recruitment cost (direct cost). Using a recruitment agency can cost the business three months’ worth of pay cheques. Using a head hunter can raise the recruitment cost significantly further – as much as 20% or more of the annual On Target Earnings (OTE) of the sales person.
- Six months’ worth of pay cheques (direct cost). It can take at least six months to reasonably identify, resolve and ultimately fire a non-performing employee. This has a direct impact on the bottom line and this cost cannot be recouped.
- Training and induction costs (direct and opportunity cost). New employees need to be initiated into a new environment, no matter how experienced they are. The recruit may spend anywhere from a few days to a few weeks attending induction and training programs to become a productive member of the business. This training has direct as well as opportunity costs to the company. During this initiation period, the employee is not able to generate any value for the company and existing employees have given up some of their productivity to spend time on the induction activities.
- Six months’ worth of business development (opportunity cost). Imagine your sales team comprises of three salespeople, and each is responsible for generating a third of your annual turnover. If one underperforms, the reality is that only two salespeople are generating revenue for the business. The business has literally lost a third of its turnover for the year. In the time it has taken you to identify this weakness, gone through the remediation and firing process and then recruited a replacement, a year could have passed. Consider how this could impact your business financially.
Can your business survive a bad hiring decision?
The above scenarios exclude costs that are difficult to quantify, such as the time you spent interviewing prospective employees, reading CVs, as well as other team members’ involvement in the recruitment process.
According to studies conduction by Dr Brad Smart, author of the book Topgrading, the average cost of a mis-hire can be six times base salary for a ales rep, 15 times base salary for a
manager, and as much as 27 times base salary for an executive! Do the maths and the figures are astounding!
The impact of poor recruitment decisions can be massive, which makes recruiting and retaining the right people absolutely critical to the success of your business.
In his book Good to Great, Jim Collins, a globally recognized expert on business growth and sustainability, writes that it is more important to first get the right people on your team before you decide what they will do. His advice, “first who, then what”, can help many small business owners avoid the costs of hiring the wrong person.
It is time to ensure you recruit and retain the right people in your business. Recruitment of the wrong people will cost you and your business not only time, but money as well.
We highly recommend that businesses embed the Topgrading hiring methodology into their recruitment process. Topgrading is the proven method for hiring A-Players 75% to 90% of the time, compared to industry standard of 25% success ratio.
