This week, at the end of June 2020, Americans are witnessing a historical event. Our small and mid-sized businesses are reopening just ahead of the July 4th weekend. Many companies, both large and small, are reexamining their business model post-pandemic: how to reconnect with customers, how to hire, how to re-hire, and how to manage remote workers. For most, the three-month lockdown, designed to mitigate the pandemic spread, did work but at a crushing cost to our livelihood.

The path forward for SMBs (small and mid-sized businesses) can be costly and fraught with unprofitable detours. How can a business owner prepare for hiring? The first step is to recognize there are hidden costs in hiring any new employee or contract worker. Understanding what those costs are fundamental. Yet once known, with small changes in your hiring process, will add to your competitive advantage.

46% of newly hired employees will fail within 18 months, while only 19% will achieve unequivocal success. But contrary to popular belief, technical skills are not the primary reason why new hires fail; instead, poor interpersonal skills dominate the list, flaws which many of their managers admit were overlooked during the job interview process.

Jeez, a 19% success rate is low! This means the inverse of those hired, 81%, were hiring failures. Can we highlight what actions, or lack of actions, can be attributed to increasing/reducing costly outcomes and learn how we can hire better?

You bet. First, let’s review and learn to mitigate those troublesome hidden hiring failures?

Annie Mueller posted a blog on Investopedia which examined these costs. I include her article here in its entirety.

“Cash-strapped businesses often hesitate to start hiring, even when they need workers, due to the actual cost of hiring employees. It’s easy to forget that the cost of taking on a new employee means more than just their salary, which can be substantial all by itself. But once you factor in the cost of recruiting, training, and more, the dollars start adding up. In its 2016 Human Capital Benchmarking Report, the Society for Human Resource Management estimated that companies spend an average of 42 days to fill a position and $4,129 per hire.1

KEY TAKEAWAYS

  • The cost of hiring an employee goes far beyond just paying for their salary to encompass recruiting, training, benefits, and more.
  • Small companies spent, on average, more than $1,500 on training, per employee, in 2019
  • Integrating a new employee into the organization can also require time and expenditures
  • It can take up to six months or more for a company to break even on its investment in a new hire

The Cost of Recruiting

Just the price of finding the right person to hire can be hefty. There are various potentially high costs just in the process of recruiting, according to business consultant William G. Bliss, president of Bliss & Associates Inc. These include advertising the opening, the time cost of an internal recruiter, the time cost of a recruiter’s assistant in reviewing resumes and performing other recruitment-related tasks, the time cost of the person conducting the interviews, drug screens, and background checks, and various pre-employment assessment tests.

Not every new hire will require the same process, but even an $8/hour employee can end up costing a company around $3,500 in turnover costs, both direct and indirect.2

The Cost of Training

Recruitment is just the first step in the process. Once the right person is in place, businesses need to provide adequate training so the new employee can do the work and start producing for the company. Training turns out to be one of the costliest investments a company can make.

According to a recent study by Training Magazine, companies spent an average of $1,286 a year on training per employee in 2019. During the same year, employees devoted an average of 42.1 hours to training. And those are not necessarily only new hires who would not only require the same on-the-job training and continuing education as current employees but the additional hours and cost of orientation and initial job training as well.3

Entrepreneur and consultant Scott Allen provides a simple way to understand training costs: “Calculate the cost of both structured training (including materials) and the time of managers and key coworkers to train the new employee to the point of 100% productivity.” 4

The Cost of Hiring A New Employee: The Cost of Salary and Benefits

The obvious cost of a new employee—the salary—comes with its own bundle of side items. Benefits range from the minor, such as free coffee in the employee break room, to the major, such as life insurance, disability coverage, medical and dental plans, tuition reimbursement… the list goes on. According to Joe Hadzima, a columnist for the Boston Business Journal and senior lecturer at MIT’s Sloan School of Management, the salary plus benefits usually totals “in the 1.25 to 1.4 times base salary range.” Hence, the salary-plus-benefits package for an employee who makes $50,000 a year could equal $62,500 to $70,000.5

The Cost of Workplace Integration

Another seemingly minor point should not be overlooked: Workplace integration, from assigning the new hire a desk to placing them with the right team of peers, can be costly. Businesses are looking at more than simply providing a computer and an ergonomically designed desk chair; there is also the cost of physical space as well as software, cell phone, travel, and any special equipment or resources required for the job.

Expenditures may also change as a result of adaptations required for returning office workers during the coronavirus pandemic. Many of these are in the process of being explored now.6

The Break-Even Point

The goal of all this investment is increased productivity—at least that’s why businesses invest. But it can take time for the costs to get covered and companies to see a return on their investment. According to the Studer Group, a survey of 610 CEOs by Harvard Business School estimates that typical mid-level managers require 6.2 months to reach their breakeven point (BEP). In other words, a mid-level manager must be on the job for more than six months for the company to earn back its investment on that hire.

Bliss breaks down the productivity scale into three periods:

  • Roughly the first month: After training is completed, new employees are functioning at about 25% productivity, which means that the cost of lost productivity is 75% of the employee’s salary.
  • Weeks 5 through 12: The level goes up to 50% productivity, with a corresponding cost of 50% of the employee’s salary.
  • Weeks 13 through 20: In this timeframe, the employee usually reaches a productivity rate of up to 75%, with the cost being 25% of the employee’s salary.
  • Around the five-month mark: Companies can expect a new hire to reach full productivity”.2

Can your business absorb the cost of a new hire while they remain unproductive but learning for a 5-6-month period? During this time, they remain an unproven expense.

What happens after that 6-month term?  According to a study by Leadership IQ, 46% of newly hired employees will fail within 18 months, while only 19% will achieve unequivocal success. But contrary to popular belief, technical skills are not the primary reason why new hires fail; instead, poor interpersonal skills dominate the list, flaws which many of their managers admit were overlooked during the job interview process.

The study found that 26% of new hires fail because they can’t accept feedback, 23% because they’re unable to understand and manage emotions, 17% due to the lack the necessary motivation to excel, 15% due to the wrong temperament for the job, and only 11% because they lack the necessary technical skills.

The three-year study by Leadership IQ, a global leadership training and research company, compiled these results after studying 5,247 hiring managers from 312 public, private, business, and healthcare organizations. Collectively these managers hired more than 20,000 employees during the study period.

While the failure rate for new hires is distressing, it should not be surprising:

82% of managers reported that in hindsight, their job interview process with these employees elicited subtle clues that they would be headed for trouble. But during the job interview, managers were too focused on other issues, too pressed for time, or lacked confidence in their interviewing abilities to heed the warning signs.

Remember these percentages: an 81% hire-failure rate and 82% of managers realized they saw “red-flags” during the interview phase and took no action. Reducing these inactions would dramatically save on hiring costs.

I would add another high cost. Imagine a bad sales hire, a client-facing representative, who damages the company’s goodwill or causes a key client to stop all transactions. Such a fallout in today’s digital world could be devastating to the organization’s survival. 

The Bottom Line

With high costs associated with hiring, the pressure is on to get your hiring process correct. As a hiring manager, HR, or C-suite executive, consider taking steps now to reduce these costs. First, is to recognize there are affordable and reliable hiring tools for your use. What to look for? Find an assessment of soft skills as a predictor of the candidate success that includes these attributes:

  • An objective screening process that removes subjective bias
  • Select assessments with a low time-cost (completion in < 10 minutes) and high completion rate (mine has a 90%+ completion rate)
  • For all new candidates include pre-populated interview questions
  • For existing employees, uncover areas for personal development and improved job performance.
  • If an employee is struggling in their current position, uncover where they may be better suited within the organization
  • Include team and individual comparisons. Especially useful in sales
  • Include automated background checks
  • Include those assessments with a Video Interviewing platform to reduce the interviewing time, saves resources, and eliminates the fear of contagion

With the proper investment, you can bring these hiring failure costs down while improving performance. One of the best competitive advantages today is to have a team of loyal, motivated workers who collectively move your business to the next level.

If you would like to learn more about how assessments may help you and your business make such an investment worthwhile and pay dividends well into the future, contact me, will@harley-consulting.com.

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