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The Cost of Vacancy Versus the Cost of a Bad Hire

Talent can be hard to find these days. That’s why recruiters are weighing the cost between higher pay and lost revenue from vacant positions. So, it’s to noone’s surprise that companies are re-assessing their hourly role criteria – requiring college degrees, drug screening, etc. But, one factor, in particular, often goes unnoticed – the cost of a bad hire! This bubbles down to the cost of taking action and making hiring decisions quickly… not, per-say, thoroughly. Yet, there is also the cost of inaction that delays hiring for background checks, employment records, and references. 

The U.S. Department of Labor puts the cost of a bad hire at up to 30% of the employee’s first year wages. That means, if you hire an employee for $70,000 a year, the employer expense could be as high as $21,000. These factors include lost productivity and customers as well as damage to your reputation and employer brand. That’s not to mention the costs of recruitment, training, legal fees and so on. Depending on the industry, how long you employ a bad hire, and how fast negative sentiment travels — experts say that the cost of a bad hire could even exceed 30% of their annual salary. 

While it varies by industry, the cost of vacancy (COV) can be estimated by dividing ‘company revenue per employee’ by ‘number of annual work days (220)’. This gives you the average revenue produced by an employee on a daily basis. Just note that it’s difficult to measure the negative impact open roles have on productivity. It disintegrates employee engagement and team morale, which makes it even harder to tie a monetary value to these metrics. 

How to Find a Happy Medium Between Vacancy and Bad Hire 

There are a few easy ways in which you and your team can, not only speed up your time-to-hire cycle, but ensure that proceeding candidates won’t jeopardize your company. 

Consider the job level.

While vacancies in hourly and lower-wage roles can significantly impact productivity, the cost of a bad hire will be less than the COV. However, for higher-level (and higher-paid) positions, the cost of a bad hire could be astronomical. In these cases, it’s better to extend the hiring cycle to fully vet candidates before extending an offer. 

The value of a realistic job preview.  

We typically serve candidates job postings that are linked to job descriptions. Even the most well-written job description only includes the basic requirements, duties, responsibilities and skills needed to perform the job. However, a realistic job preview shares both the good and bad aspects of a job (remember “good” and “bad” are relative terms). Applicants may know little about the position for which they are applying and/or have inaccurate perceptions. Realistic job previews teach candidates about the work environment, duties and expectations that help them gauge whether they’re a quality fit. This cuts down on poor-fit hires that stay in a roles that “aren’t what they anticipated” just for a paycheck. 

Set a probationary period.

Be clear that this is for the new hire as much as it is for the company! Depending on the role, this can be set between 30 and 60 days. This gives either party an easy departure from the employment agreement should it be a poor match. Just ensure that you train your managers to evaluate new hires quickly and that they have a direct line to HR. The longer it takes to identify and remedy a bad hire, the more it will cost you in the end. So, by establishing a window for clear expectations, you can reduce lengthy performance improvement discussions and termination processes. 

Conditional employment offers.

Conditional employment allows an employer to extend an offer prior to completing hiring steps (e.g., drug tests, background check, criminal background check, etc.). Theoretically, the employer can then withdraw the offer if a condition of employment isn’t met. Note that employers must be aware of applicable federal, state and local laws around conditional employment before enacting this policy. It must always be clearly spelled out in the application and onboarding paperwork. 

For most companies, the cost of vacancy indicates whether you need to better your hiring decisions while securing candidates swiftly. The cost of a bad hire must always be factored into the cost of doing business. With just a few small changes, you and your team can reduce the costs associated with both!