A bad hire. A failure. Or at least that’s how it feels. You failed to hire the right person for the right job. You were simply not able to predict this candidate’s potential properly. So you must not the best recruiter, Head of HR or founder. Just as simple as that, right?
If that’s what you’re thinking, you’re wrong. A bad hire happens to all of us. However, there are some tips and tricks that might be helpful to prevent yourself from getting into this situation.
After reading this article you will know:
- The 3 most common causes of a bad hire;
- The 3 categories of the financial impact of a bad hire;
- 3 tips to prevent yourself from making a bad hire.
The 3 most common causes of a bad hire
Every company’s success (and yes, every company) is determined by the impact of its team. Each single team member impacts your company performances and therefore influences your success. And the smaller your team or the younger your company, the more impact this one single team member will make. So therefore a bad hire affects startups and scaleups ten times heavier than an enterprise organisation.
Research over the last three years has shown that, especially in young, scaling companies, these are the three main causes of making a bad hire:
- Lack of resources;
- Lack of data usage;
- Lack of internal insights.
Lack of resources
Hiring requires efficiency and guidelines. It’s all about setting up the right processes and stick to that. Alright, that’s something we can all manage, but once we have these processes we also need some human power to implement these. This implementation might be a tough challenge for scaling companies with limited human resources, financial resources and a high need for new colleagues.
This is what we often experience when talking to these scaling companies:
- The People Team is very small while the need for new colleagues is high. In order words: They have too much on their plate.
- The hiring intensity and team development requires for budget to professionalise and automate processes, while there’s hardly any budget allocated to HR/Recruitment.
How this causes a bad hire
The consequence of these practices: The People Team is way too busy and has insufficient tools to work efficiently, which stimulates mistakes, inaccuracy and the chance of candidates walking away to the competitor.
Lack of data usage
I know it’s not a popular thing to say, but data beats our human instinct quite often – especially when it comes to hiring your new colleague.
Why? Well, simply because data learns. A suitable algorithm learns from the data you feed it with and doesn’t have any bias. So a mistake is never made twice. Unfortunately, that’s not how it works with our brains. We base our decisions on so much more than objective data – we let our feelings grab a chair, we forgive ourselves for forgetting crucial information and we also have our frame of reference (i.e. our unconscious bias) standing in the corner the of room watching us. So yes, we also learn for sure, but we will always leave our door open for bias and potential mistakes. Data doesn’t.
Again the budget issue is a relevant one here, because properly using data in hiring decisions requires working with tooling that supports running these data analyses.
How this causes a bad hire
I won’t say that data is a most have to prevent any bad hires, but it certainly helps you reducing it to a minimum level. Without data usage in recruitment, hiring decisions are more based on gut feeling and bias rather than objective evaluations and mistakes are often made more than once because our brain doesn’t allow us to remember and learn from every single decision.
Lack of internal insights
Maybe this is even the most painful one, because this is the one we don’t expect to be relevant to our organisation. Because we know what’s happening in our very own team right? We know what people we have on board, what our values are and who fits into this rockstar team.
Internal insights are the insights that tell you more about your current team composition and therefore your hiring needs. This information can be used to determine your next best-fit hire for the team who both fits your culture and adds value to the team in terms of skills.
We have experienced that scaling companies go through different growth stages:
As you can see there are some team growth stages in which your knowledge of job fit and cultural fit decreases. And that’s completely normal. Companies change when they grow and so does the company culture and team skill set. Therefore it’s extremely important to master your internal insights to prevent yourself from hiring for skills which are irrelevant to your growth stage.
How this causes a bad hire
When companies are transitioning from one growth stage to another, hiring needs change as well. Unfortunately many companies aren’t aware of this transitions and therefore hire people who would have fit the company maybe a year ago, but not at this point. Or maybe it would be the perfect hire next year, but for now it’s too soon.
The 3 categories of financial impact of a bad hire
Okay, so you made a bad hire. Yes, it’s painful, but it’s not the end of the world. The financial impact, however, is something you should definitely be aware of…
Broadly speaking, one single bad hire impacts the following three cost categories: Salary; company results; hiring costs.
In most cases, a bad hire isn’t recognised during the trial period of the employment contract. In The Netherlands it’s quite common to offer a new employee a 7-months contract to start with, for example. This means that you will have to deal with someone who might be a bad hire for at least 7 months even if they seem to be a good fit during the first trial month.
For example, you hire a Account Executive with a gross monthly salary of €3,500, this is an annual salary of €42,000.
Applying employer’s taxes, lets take 30% of the bruto salary for this example, means a monthly cost of € 4,550.
If this person turns out to be underperforming after the first 7 months of their contract, you’re facing the financial loss off €31,850.
Company & role related results
This is slightly tougher to calculate, but let’s give it a try.
Imagine you’re hiring a Account Executive. It’s expected that this Account Executive will start closing deals in their 3rd month at your company.
From that moment this colleague should close 3 deals per month, representing a yearly value of €3,000 per deal. This means that during the first 7-months contract your Account Executive should be able to close 12 deals, representing a total value of €36,000.
Unfortunately, you made a mishire, and your Account Executive is only reaching 30% of their target. Meaning they only closed 30% of the 12 deals, equating 4 deals, and representing just €10,800 in revenue.
The underperformance costed you €36,000 (target) – €10,800 (achieved) = €25,200 in missed revenue.
We chose the position of Account Executive for this calculation as sales targets are easier to quantify than for most other roles. Please beware that the financial impact for other roles might be more difficult to calculate but can be even higher than the above calculations. Think about Software Engineers missing deadlines, or Marketing Managers pushing campaigns not showing any results.
(Human) hiring costs
Last but not least, there’s the effort of hiring a new colleague. Please note that we here only focus on human effort, all marketing costs and hiring tools are disregarded for this calculation.
Let’s say that your team spends on average 40 hours on hiring a new colleague. This includes sourcing, evaluating applicants, creating a short-list, interviewing and actually hiring a this person. Also, both founders/leaders and recruitment experts are involved.
An average HR manager monthly salary in the Netherlands of €4,475. Applying employer’s taxes, let’s take 30% of the gross salary for this example, which means a monthly cost of €5,800 for the employer.
Taking 130 working hours per month on average, this means one-hour costs €44.5.
Now, if the HR manager spends on average 40 hours sourcing, reviewing and screening resumes, writing the job description and preparing for the role prior to interviews – it adds up to being €1780 of your costs.
Of course there are also first interviews and second interviews, which let’s assume will take up 15 hours of the HR managers time, equal to €667.
Taking all three categories together, the total loss of hiring the wrong Sales Executive adds up to being €59,497 while the annual gross salary of this colleague was €42,000.
This means your bad hire cost you 141.66% of this person’s annual salary. Ouch.
There are also other costs involved in this process, for example, placing job advertisements online (which start at around €400 each & often you’ll choose two or three of these just to be safe, totalling close to €1000); or perhaps you use an external recruitment agency (of a standard fee between 15% and 20% of the first-year salary for a permanent job the recruiter is filling, so around €6,300 to €8,400)…
P.S. I want to make it absolutely clear that this is a rough estimation of the potential costs involved when making a bad hire and we only focused on three main aspects of this.
3 tips to prevent yourself from making a bad hire
More than 141.66% of someone’s annual salary. I can imagine that this percentage might scare you a bit. The good news: Bad hires can be prevented!
And yes, I’m going to provide you with three tips, because that’s what I promised you when you started reading this blog, but the real secret follows after my three tips.
Tip 1. Get budget for tooling by creating a business case
There’s a reason why the market for hiring technologies is exploding. It’s because these tools help you! Hiring technologies help you hire faster, better, in a more fair way and automate significant parts of your hiring process. However, since HR is often experienced as a burner department rather than an earner department, you should convince your company’s management team by creating a solid business case.
Our technology, for example, helps companies (i) identify their hiring needs, (ii) predict a candidate’s fit and (iii) ultimately make the best possible hiring decision.
Maybe this sounds like a nice-to-have, but once you quantify a tool, it all of a sudden becomes an absolute need-to-have. You should find out (and write down) the following things:
- What’s the annual/monthly fee for system X;
- What’s the goal of working with system X;
- How to quantify this goal.
For example, Equalture:
- Starts from €409 p/month;
- Helps you save 54% of your time spent per job opening, prevents a bad hire and moreover ensures you will hire a top-performer;
- When hiring one Account Executive, this saves you 21.6 hours (€44.5 p/hour, which results in €961.2) and ensures a financial result of €36,000 during the first 7 months (the closed deals).
So, taking the risk of making a (very costly) bad hire while spending more hours on hiring versus ensuring the best-fit hire in less time spent on hiring. There you go. Now it’s a must-have, because it’s a proven business case.
Tip 2. Data is your best friend!
I think this is a no-brainer, but I’m mentioning it anyway. The market is full of incredible tools able to boost your hiring process using data, but that will never work for you unless you have the right mindset.
Data is not the enemy. It’s not going to replace your job. It won’t take over the world. It’s just there to help you. Data can for instance save you time and limit the impact of bias by creating a first impression of a candidate that is objective. However, like I mentioned, finding the right tooling to get you started making data-driven decisions isn’t the challenge.
You are. And your colleagues are.
It’s all about mindset.
Tip 3. Your company is your very own data set
Okay, so data is cool. You know what’s even cooler? Your team! Or actually knowing what’s in your team. Which skills do we master? Which skills are we missing? What are the personal traits indicating company culture? And are there any missing traits or soft skills that could be of added value to our team?
You can actually measure this quite easily, for instance by using an assessment for your own team. Our product helps you identify your hiring needs by analysing your current team through neuro-assessment games.
Now at least you won’t open a new position in your team based on guessing, but on actual data.
The real secret?
The real secret to prevent yourself from making a bad hire? Acknowledge that company sustainability starts with hiring success.
Your team is your everything. It’s your strategy, ambition, critical view and execution. There is no company without a team. Once you start realising that, hiring is no longer an operational tasks. It’s the most important strategic pillar at the table! And that’s all you need to deal with hiring the right way.
I hope that this blog has helped you understand the causes and impact of a bad hire, but moreover how we can prevent ourselves from making such a painful mistake. And please remember the following two things:
We now talked about company impact, but please don’t forget about team impact. Bad hires can really damage team dynamics and your colleagues’ motivation, which has way more impact than some financial losses.
Yes, it’s painful to your company that this happened. Just keep in mind, however, that it might be even more painful to your (ex-)colleague who is told to leave the company after 7 months..
My advice to you: create a hiring process that puts people first. Every human being is unique. You just have to know how to reveal it 😉