The cost of turnover: When bad hires and firings drain your resources
According to different estimates, a poor hiring decision may cost businesses between $15,000 and $50,000. Even the lower figure is already alarming, but bad hires may lead to other losses, too. Besides money spent directly on salary (including recruiter’s fee), as well as consequent firing and rehiring, businesses lose valuable time and resources because of employee turnover. And while no one is 100% safe from hiring poorly suited employees, strategic recruiting can minimize this risk.
Below, we break down the full costs of bad hiring decisions and offer suggestions on improving your recruiting processes — based on real-life practices from today’s market leaders.
The real cost of high turnover
Depending on business specifics, the full cost of a bad hiring decision involves financial losses between 50% and 200% of the employee’s annual salary. This includes direct losses of paying full salary while facing poor employee performance, covering the recruiter’s fee (or salary of in-house recruiters), the cost of training and onboarding, and legal severance costs when applicable. Besides, there is an urgent need to fill a job opening once again, so employers have to cover recruiting expenses all over again.
However, the highest, even if less tangible, risk of a bad hire is its potentially negative impact on corporate morale, team productivity, and overall workplace atmosphere. For starters, underperforming employees increase stress and workload for their team members. This also increases the risk of individual burnout and team productivity loss.
Besides, a poor cultural fit may disrupt the team dynamics — simply because the professional skills and personal qualities do not overlap with those of your existing staff. And finally, higher turnover and regular introduction of new staff makes it difficult for a team to form in the first place.
Is there an ‘acceptable’ turnover rate?
Employee turnover rates vary by industry, with the tech sector experiencing the most turmoil these days. In contrast, the public and government sectors traditionally enjoy the least employee turnover, while other industries go through their ‘seasonal’ ups and downs, affected by social, political, and economic factors. So, there is no ‘standard’ to aspire to, and it’s important to analyze the current market situation within each industry when calculating employee turnover.
Notably, some market fluctuations are hard to avoid, but the sad truth is that one cannot blame high employee turnover on socioeconomic factors alone. Even today, when the tech sector has an over 60% employee turnover rate, some companies, like Google and Apple, enjoy relatively stable retention rates, while others, like Tesla and Amazon, have difficulty retaining their human talent.
This leads us to an even more important question — why do bad hires happen and how to avoid them? To answer this, let’s try to analyze today’s hiring practices from tech market leaders.
Tech giants hiring strategies: Wise vs faulty
The unquestionable market leaders, Google, Apple, Amazon, and Tesla, all rely on a mix of recruiting strategies to attract the best talent. And while all four succeed in hiring top professionals, company retention rates vary drastically. What’s the main difference, then?
Here, the fault usually lies with the management (sometimes, at the highest level) rather than business specifics. Google, for example, implements a rigorous interview process tailored not only to each specific job role but also to each candidate. The company focuses on behavioral questions and problem-solving tasks while evaluating the candidate’s cultural fit. And speaking of company culture, Google is heavily invested in diversity and inclusion.
Apple implements a similar approach, prioritizing the candidate’s problem-solving skills and, above all, teamwork abilities. Both companies enjoy a good hiring reputation and achieve higher-than-average retention rates in the tech sector thanks to their generous compensation packages and strong brand reputation.
In contrast, Tesla and Amazon focus on candidate performance rather than personal qualities. Even though both companies ask their share of behavioral questions during job interviews, their focus on rapid company scaling often leads to massive layoffs shortly after onboarding and a repeated hiring cycle a few months later.
Such policies clearly take their toll on company image, negatively affecting brand reputation. And while both Tesla and Amazon are undeniable market leaders in their respective niches, both companies regularly face criticism for their employee malpractices, demanding work conditions, and lack of inclusion.
Best strategies to avoid bad hires
The above examples prove that nurturing a positive company culture and carefully evaluating candidates’ cultural fit is a better recruiting strategy in the long run. But what’s the best way to achieve this, and more importantly, is there anything else recruiters can do to improve employee retention rates? While there is no universal recipe for success, the following strategies can help.
Prioritize passive candidates
Even though there are many talented professionals among active job applicants, the main problem with an active candidate pool is that most of these people need a new job — and quickly. So, most applicants adjust their resumes to a specific job opening — which is all right, but only as long as the information is not too embellished.
In contrast, passive candidates will only consider changing employers if another company makes a more enticing offer or is already a better cultural fit. Besides, recruiters searching for already employed experts usually have more time for a background check — especially considering that directories offering access to employees profiles also feature a wealth of other information on candidates. This gives HRs a chance to pre-screen suitable candidates before reaching out to them.
Introduce referral programs
One of the surest ways to assess a candidate’s cultural fit is to engage your current colleagues in the hiring process. After all, they’re the main judges of what makes a ‘good’ fit. The easiest way is to introduce employee referrals, allowing your existing team to suggest their former colleagues, alumni, or peers. As a bonus, referral programs can seriously increase your candidate pool and shorten recruiting cycles.
Understand the main red flags
Candidates can display many red flags during a job interview, and their lack of enthusiasm is usually the most alarming sign. Inconsistencies in work history, refusal to provide references, or failing to keep eye contact also make it to the list, among many other things. But beware of the one-size-fits-all approach; what may be a red flag for one job opening could be a nice bonus for another. So, it goes down to understanding the job requirements and the kind of candidate you’re looking for.
Analyze potential, not just achievements
As already discussed, Amazon and Tesla are well-known for their focus on results and performance. And yet, even the most result-oriented employees cannot linger in a competitive environment with unrealistically high expectations. Besides, established professionals with a set of past achievements may already feel comfortable with what they’ve accomplished so far. In contrast, candidates with a desire for continuous growth and self-development never stop at the top. Clearly, they are a better choice for today’s fast-paced, constantly changing job market.
Finally, keep improving your onboarding process and invest in additional training programs when necessary. Often, employees leave simply because management does not make an effort to integrate them into established workflows. All in all, professionals who feel appreciated for their work tend to stay, thus boosting employee retention and brand reputation.