I had a very unusual conversation with an HR manager awhile ago. We were talking about the value of careful reference and background checking, and I was asked what it would cost to complete a thorough reference check. I replied that, depending on the position, a standard three-reference report would be about $400.
The response was, “Oh, we’d never spend that much just to check references. As a matter of fact, we’re very proud of the fact that our average cost-per-hire is less than $300.”
Later in the conversation, he asked if we could do exit interviews. I said we could and asked him what their annual turnover rate is. “Oh, nearly 40%,” was the answer. I couldn’t help thinking, “Have you stopped to calculate what it’s costing your company to replace 4 out of every 10 of your employees every 12 months? You’re spending more to replace – not to mention, train – new people than you would ever spend if you were more careful about whom you hired in the first place!”
Having done an extensive survey of our clients, we have learned that the actual out-of-pocket cost of hiring the wrong person for the job, regardless of the reason, is three times the annual salary for that position! In other words, if the job pays $50K per year, the total cost associated with hiring the wrong person (including all the costs associated with replacing that person) will be approximately $150K!
That amount is calculated by adding up the pre-employment costs, such as running ads and bringing candidates in for interviews, along with the costs of pre-employment screening, the cost of training, the amount of salary, and the value of the benefits already paid out, plus the cost of duplicating that entire exercise to find a replacement. And that total doesn’t include the less obvious costs that can accrue from loss of business, damage to the company’s reputation, and potential harm to the morale of the people within the organization.
The point, simply restated, is that it’s much less expensive to ensure that the best person is being hired the first time around. The smart strategy, therefore, is to do everything possible to make the most informed hiring decision, rather than run the risk of a seat-of-the-pants hiring decision that could backfire and result in an annual turnover rate of 40%.
The cost-per-hire may go up, but turnover costs will drop precipitously!