According to a study by the Society for Human Resource Management (4/19/2013 SHRM Bulletin), cost-per-hire in the Southwest Central region averages $2,829. Annual turnover rates vary widely, but are in the 15-20% average range across all US industries. Whatever the numbers are at your company, wouldn’t it be better to waste fewer dollars on turnover costs, and to be more effective at hiring the right person for the job every time?
This article will provide you with specific ideas on how you can do it at your organization.
The Costs and Problems of Turnover
Let’s first look at the hard and soft costs of turnover.
Hard costs are usually defined as recruiting and hiring; training and onboarding; salary and compensation; and other lost costs that can be quantified in terms of dollars spent on an employee who is hired and subsequently leaves your organization. Hard costs are the simplest to quantify.
Soft costs are defined as: time spent by management trying to manage, discipline and motivate an employee who is hired and subsequently leaves your organization; the stress and headaches experienced by those who must manage the unsuccessful employee; lost employee or team productivity due to conflicts or underperformance issues; or lost customer opportunities or sales due to the non-performance of the employee who is hired and subsequently leaves your organization. Soft costs are often hard to quantify, but still take a toll on the organization’s productivity and bottom line.
Quantifying Cost – An Example
What does turnover really cost? Let’s look at an example of a 100 employee company with 15% turnover, using modest numbers:
- Average employee base salary of $40,000.
- Annual benefits = 20% of base salary
- Vacant position is ‘covered’ by temps or other employees for 30 days until it is replaced
- Hiring manager base salary is $80,000.
- Cost of online or print advertising / posting is $1000.
- 8 hours are allocated for 1st and 2nd screening/hiring interviews
- Cost of candidate screening assessments used is $500.
- Cost of background checks is $150.
- Training manager or related employee base salary is $45,000.
- New employee receives 15 days of training during their first ~90 work-days of employment
This company’s annual hard cost of turnover is about $209,000. That’s about $2,100. per employee. Every year, this amount is deducted from the bottom line. Remember, this company makes ZERO return on investment on these dollars.
Given the spiraling costs of benefits, healthcare, etc., it makes sense to look at every area for cost savings. This hole in the bucket can be plugged (and we’ll get to that later).
The Benefits of a Better Hiring Process
Now, let’s look at the benefits of improving the hiring success. An effective hiring process is the key to solving many problems and getting personnel costs under control. It can prevent many problems before they occur.
An effective hiring process leads to a high performance and should be part of an overall talent management strategy for any organization. It prevents the wrong people from being hired, and ensures that the right people are hired. It attracts top talent, and leverages the employer’s brand and reputation in the marketplace and the industry in which it competes.
A poor hiring process can lead to increased hard costs in recruiting and hiring, training and onboarding, salary and compensation, turnover, legal liability, absenteeism, employee benefits, customer service and quality issues and other costs which can be quantified in terms of dollars spent on a employee who is hired, performs poorly and then is terminated or leaves your organization. Soft costs associated with poor hiring include poor morale, opportunity loss, discipline issues, decreased engagement levels, workplace conflicts, lost management productivity, etc.
How To Solve The Problem
Here are 9 basic steps to reducing turnover and creating a better hiring process:
1. Define what you want by writing a good job description.
Ask yourself, “What would it look like if someone did this job ‘just right?’” Take some time to carefully define the important and critical aspects of the job, rather than just finding a person who might do some job well. This way, you’ll hire the person who 1) is right for the job and 2) is excited about doing the exact job that you want done.
And since many of the people you’ll be recruiting are ‘passive’ candidates (currently employed and not looking for a job), a clear and exciting job description may be the reason they’ll initially consider a new or better position than they currently have.
2. Develop an interview worksheet specific to the position and insist that every interviewer uses it with every candidate.
Passive candidates often don’t have a current or updated resume’, so you’ll have to gather accurate information about them some other way. Here’s how. Each person who interviews the candidate, whether by phone or in person, should ask the questions on the interview worksheet, taking note of the candidate’s answers. Immediately following the interview, each interviewer should use a standard “grading system” to rate the individual’s performance in the interview. This ensures that interviews are conducted in a thorough, professional manner and helps you capture more of the critical information that will be useful in making your hiring decision later (see step 7).
3. Require all applicants to respond in a pre-determined manner.
You want to hire people who really want to work at your organization, right? The job description should include a pre-determined ‘How To Respond’ process. Here’s why. Your ideal candidate should 1) really want the job, 2) be qualified and 3) go through some effort to get the job. So here is a simple test. If a candidate will not be diligent or follow directions prior to being hired, they certainly won’t behave differently after they’ve become your employee. IF – the candidate is qualified based on the position description and responds in the manner you’ve specified – proceed to Step 4
4. Do a brief (20-30 min.) phone interview first.
If the position will involve working with customers or routinely communicating with others, do this before meeting for a personal face-to-face interview. Jobs that deal with people require effective communication skills. A phone interview will quickly determine if your candidate can communicate verbally, listen, build rapport, think on their feet and stay on track. Unless personal appearance is a critical aspect of the job, it shouldn’t matter what a person looks like at this stage in the process.
If the initial phone interview is satisfactory, then proceed to a personal interview where you can get to know your candidate better and assess job-specific skills, presentation skills, personal appearance/dress (as required or appropriate); and pick up on any irritating quirks, mannerisms or other things that were not observable on your phone interview.
When communication is critical to the job, do not waste time conducting personal interviews with a person who can’t communicate well enough to pass a brief phone interview first.
5. ‘Inspect what you expect’ by performing pre-hire assessments and checking the candidate’s background and references very early in the process.
This can prevent many employee problems before they occur. As a stated pre-condition of employment, get the applicant’s written permission to perform any necessary reference-checks (i.e.; criminal background, credit checks, drug-testing, etc.) and a pre-hire assessment. Always perform these steps early in the process, rather than as part of the final interview or hiring process and never after making the candidate a job offer. This simple step can eliminate ‘problem’ candidates, and some will voluntarily withdraw from the application process.
A brief, inexpensive pre-hire assessment can provide you with useful information about the candidate’s attitudes regarding integrity, reliability, substance abuse and authority – which could contribute to problems later in their career. This assessment will give you valuable insights and specific questions to ask the candidate during their personal interview.
6. Use quality assessment tools to determine the applicant’s suitability for the position.
New assessment technology can help you determine a candidate’s ‘job-fit.’ You can accurately determine a candidate’s match with specific job requirements, occupational interests, personality and behavior traits; promptness, integrity, customer service and sales skills; cognitive abilities (math and verbal skills; learning style, etc.), work ethic, fit with the team or supervisor; and other potential risk factors or contributors to job success – prior to conducting the first personal interview.
Specialized assessments can help determine a potential candidate’s suitability to technical positions, sales, customer service, marketing, executive, financial, leadership, supervisory and a variety of other careers and positions – prior to final consideration.
A word of caution: never use a single assessment as your only basis for selecting candidates. Instead, use appropriate, valid and reliable assessment tools as part of a good interview and selection process, as described here.
7. If a candidate interviews well, and has a close match to the position based on the assessment data, the candidate can advance further through the hiring process to the offer.
Quality assessments will provide relevant interview questions based on the candidate’s match with the performance model (see Step 8) for the Hiring Manager who is not trained in interviewing. Interviews are an important part of a hiring process, but are a notoriously poor method of determining a candidate’s actual job-fit for a specific position.
NOTE: Conduct multiple interviews (see steps 2 and 4 above) – using peers, team-members or other employees – in addition to the hiring manager or supervisor. Every interviewer will gain valuable insights about a candidate, both positive and negative. A good candidate should give clear, consistent answers in every interview. When your ‘hiring team’ agrees on the candidate, proceed to step 9. If not, see step 8.
8. Identify key critical positions within your organization for which there are either open positions or predicted growth and demand.
Perform studies of the current top, middle and low performers in those positions in order to determine their specific differences. This data can then be used to create ‘performance models’ in order to help you identify what specific characteristics are common to your top performers.
9. When your performance models have been created, candidates should be assessed early in the recruiting/interview process.
Accelerate the interview/hire process for those who match the performance model criteria and characteristics of your best performers. Consider passing on those candidates who match the performance model criteria and characteristics of your low performers. Our ultimate goal is to hire only the candidates who have attributes similar to your current top performers in each of your critical positions.
The Potential Positive Impact On Your Bottom Line
Why assume that any % of turnover is acceptable? The goal should always be to reduce it to the lowest level possible. Our example company has 100 employees with 15% average annual turnover, costing $209,000. every year. If we reduce this just 12% (by replacing only 11-12 employees per year, rather than the ‘normal’ 15) the results are dramatic:
- By reducing turnover at this company by only 25% – they ADD $52,250. to the company’s bottom line.
- For each employee the company hires right and retains in the future, the company saves $13,933. in recruiting, hiring and replacement costs, each subsequent year. ($209,000. ÷ 15 = $13,933.)
There are other benefits to reducing turnover and improving the hiring process. By improving the hiring process and hiring only employees who match the performance model criteria and characteristics of current top performers in key positions, we will see an overall increase in per-employee productivity, each subsequent year. Here are some striking numbers to consider:
- Let’s assume that this company has revenues of $100,000 per employee, resulting in annual revenues of $10,000,000.
- Our target is an initial 5% increase in average per-employee productivity in the first year.
- In the first year, company revenues increase to $10,500,000. (10,000,000 x 5% = $500,000.) without a single additional employee.
- 3-4 employees in the previous year performed at sub-par levels and were replaced. Each of those positions now are filled with employees who perform at levels similar to top performers. Due to ‘natural turnover’ levels at this company, more positions will be filled by employees who perform at or near the level of the company’s current top performers – each subsequent year.
- Since turnover was 15%, this means that 85% of the company’s employees delivered 100% of the company’s results prior to implementation of the new hiring process. The actual per-employee revenue was $117,647. ($10,000,000. ÷ 85 = $117,647.) Note: some will point out a flaw in calculation here, but remember, employee turnover is a cost, and does not produce revenue. Lost productivity and opportunity for under-performing employees also can never be recaptured.
- If all 100 employees were performing at acceptable/goal levels of per-employee revenue of $117,647., annual company revenues would increase to $11,764,700. ($117,647. X 100 = $11,764,700.)
This dramatic increase in overall company productivity and revenues is achieved without a single additional employee.
There Is A Cost To Inaction
By not taking action to reduce turnover and improve hiring processes, costs continue to pile up. Productivity and sales revenues continue to be lost. Turnover and management headaches continue unabated. And competitors have the opportunity to snatch your top talent away.
Remember how much time, money and productivity was wasted when you made that last hiring mistake? Given the high costs and negative consequences of poor hiring like turnover and employee problems, it’s worth the time and effort to find the right person for the job. Think about the impact that your best employees make on your organization’s bottom line and success. Wouldn’t you like to find more people that look just like them? Don’t settle for less.
This article began by discussing the real costs of turnover. It closes with the prospect of a return on investment by eliminating the problem, and improving your hiring process. If you’d like some help, contact On Purpose Enterprises for a confidential discussion today.