How Much Does a Bad Hire Really Cost?

How Much Does a Bad Hire Really Cost? – In the Hospitality Industry

How much have bad hires cost you and your business… tens of thousands, hundreds of thousands, millions of dollars? How do you combat turnover/bad hires within your hotel, resort, or business? Tony Hsieh, CEO of Zappos estimated that his own bad hires have cost his company well over $100 million.

The hospitality industry currently has the 3^rd highest demand for temporary employees, out of all industries. However, the skill shortage along with the increased demand for individuals within the hospitality industry can cause companies and employers to hire a candidate who can do the job, but may not be the best fit within the organization, to avoid the loss of productivity from not having an employee in that position.

As a restaurant executive, hotel executive, president, director, manager or owner of a hospitality business you may be wondering, “is that loss of productivity worth hiring an ‘OK’ employee?”… The answer is NO. The cost of a bad hire can cost 10x as much as working with a hotel executive recruiter.

In fact, the #1 reason companies make bad hires is because they settle for an o.k. candidate, rather than taking the time to find the right candidate that meets both the position qualifications and that fits with the company’s culture. Nevertheless, you’re probably wondering, what is the exact cost of a bad hire?

“Forty-one percent of companies estimate that a bad hire for an entry-level position costs more than $30,000, and one in four said it costs more than $60,000,” according to a recent CareerBuilder survey regarding the cost of a bad hire.

Ultimately cost of a bad hire depends on the level of the employee and their salary, whether their entry level, management or c-level, and how long they’ve been working at the company. Nevertheless, the cost of a bad hire includes more than just the annual salary of the employee, it includes the costs of training the employee, HR staff costs, the costs of employees who have to spend time interviewing the candidate(s) as well as the cost of marketing the position on various job boards. Below is an in-depth example of a typical cost breakdown of a bad hire for a hotel executive in the hospitality industry.

Productivity Loss = the annual salary of the employee

Training Costs = about 35% of the employees annual salary

Interviewing Costs = $150,000 divided by 2080 working hours, times 25 hours

HR Staff Costs = $150,000 divided by 2080 working hours, times 30 hours

Employment Ads = $1,600 for 4 LinkedIn ads

For example, the cost of a bad hire for a hospitality employee making $150,000 annually, is around $200,000. On average the total cost of a bad hire can be anywhere from 20% – 200% of the employees annual salary depending upon the position; which is 10X the amount it would cost to work with a hospitality recruiter on the open position. For hotels and larger hospitality businesses with hundreds or thousands of employees all with similar tasks (i.e. housekeeping), the affect of one bad hire can be detrimental, especially if that person is in overseeing/management role. Tony Hsieh, CEO of Zappos estimated that his own bad hires have cost his company well over $100 million.

Bad hires aren’t just individuals you hire, who then quit within 6 months to 1 year. Bad hires could have worked within your organization for years and might even still be working there. The longer they’re there the more it could end up costing you in the end.

With such a high monetary cost for bad hires, we tend to over focus on that area; however, those effects go beyond just cash and often extend into the productivity of other employees, which ultimately impacts the client’s perception of the business and the service they receive. In fact, a survey of employers and hiring managers within the hospitality industry found that in addition to lost worker productivity, 77% lost time from having to recruit and train another employee, 36% saw a negative impact on employee morale, and 22% saw a negative impact on client solutions. “One subpar employee can throw an entire department into disarray, which puts you at risk of losing your good employees,” states Ryan Holmes, CEO at Hootsuite. In the end, it’s harder for a manager/team to accommodate an underperforming employee than it is to take the time and money to invest in recruiting quality candidates, especially with the already large skill shortage within the hospitality industry; which is why so many hospitality businesses have begun to enlist the help of specialized hospitality recruitment agencies.

Lost Hires –

As was mentioned earlier, because of the high monetary costs associated with bad hires, we often times focus solely on the impact they have on the company, however they aren’t the only employees who cost businesses money. Lost hires, candidate(s) who have rejected the company’s job offer, do the same thing, especially if they’re the only candidate a company currently has in play for a particular position. Getting to the job offer stage with a rock star candidate (especially with the skill shortage in the hospitality industry) and then having them turn down the job offer feels like the wind has been taken out of your sails; however, it’s not all that uncommon. In fact, candidates turn down 35-50% of job offers at the offer stage, and 56% of employers reported having a candidate reject their job offer in the last year. This can leave you and your business scrambling to find a replacement candidate, or worse, forcing you to settle for an “OK” candidate.

The good news is that there’s a way to help avoid those lost and bad hires; RECRUITERS. While this may seem redundant or repetitive, recruiters know their industry and the people in it. They have thousands of connections with top-notch industry talent and can help mediate the job offer conversation, so the candidate isn’t surprised by the offer or benefits at the offer stage and the client can be confident that the candidate will accept the offer. Remember you’re only as good as the people who work for you.

Sources:

The Hiring Site (powered by Careerbuilder), What’s the True Cost of a Bad Hire?, December 2013 [thehiringsite.careerbuilder.com]

An Accounting of Why Candidates Decline Job Offers [http://abacusnyc.com/blog/post/why-candidates-decline-job-offers]