Updated: Feb 26, 2019
Human nature helps explain errors in hiring decisions, but figuring an exact cost is a distraction.
Imagine earning a substantial bonus at work. Further, assume you have an appropriately managed retirement account to which you responsibly contribute. What percentage of that bonus should you save for your future self (i.e., your retirement) and what percentage would you enjoy today?
Now, remember the last time you faced a scenario like this. Did you save as much as you probably knew you should have? If not, perhaps you're part of the 66% of 30- to 49-year olds who, in 2018, estimated that they would not have enough money to live comfortably when they reached retirement age.
The tendency to prioritize short-term needs over our long-term interests is a well-researched feature of our day-to-day lives. As neuroscientists and cognitive psychologists have known for decades, our ability to evaluate and prioritize urgency is guided by two parallel, interacting modes of information processing: an analytical system (logic-driven) and an experiential system (emotion-driven).
We often make decisions based on convenience - we value the convenience of take-out even though we know it’s more expensive and less healthy than cooking at home; we wait to buy gas until the warning light blinks on the dashboard. Even Congress is terrible at planning for budgets on time.
Even when people know their thinking is irrational, they often find it more compelling than their rational reasoning. - Seymore Epstein, PhD - cognitive psychologist
It's not that we're a country full of laggards, but it's simply human nature to focus on what's in front of us, and to bias our consideration of risk with emotions over logic. The logical shortcuts our brains use often lead to quick and efficient decision-making, but we're not very well-equipped to use those same heuristics to predict future disappointment. In other words, humans are great at getting ourselves out of short-term pain, but pretty lousy at avoiding the same sensations in the future.
This may help explain why organizations sometimes miss opportunities to plan for the long-term success of their employees when they have an urgent vacancy to fill today. We know that getting the “right” hire is important, but the reality is we over-invest in addressing the costs an understaffed team is experiencing in the short-term, instead of assessing the damage of a bad hire in the long-term.
Especially in a tight labor market, hiring leaders can be so focused on filling seats or chasing scarce technical skills that they fail to spend the time or effort required to ensure a candidate will contribute to their organization’s culture. In turn, organizations trade candidates with strong cultural fit for those with promising technical fit.
This is unfortunate, as the nourishment of a strong organizational culture is well worth the time and treasure spent selecting employees that will enhance it. The likelihood of turnover at organizations with rich cultures is 34.5% lower than companies with poor cultures. Additionally, employees that fit well with the organization’s values and social environment are more likely to be satisfied with their jobs and show improved performance. Since alignment in cultural values leads to organizational success, hiring for values-fit is at least as critical as hiring for trainable skills.
A strong organizational culture is well worth the time and treasure spent selecting employees that will enhance it
Some of this can be explained by the fact that the near-term costs of “bad hires” are tangible, but the long-term costs are hypothetical: The costs of lost sales and upset customers quickly pile up. We can also quantify the hours lost on recruiting, hiring, and onboarding replacement hires. However, less concrete are the costs associated with poor
— or even mediocre — hiring decisions. How do we quantify the financial impact of a leader who doesn’t embody our organization's values? How can we put a price on the unique chemistry of a high-performing team?
It is tempting to solve this issue with numbers. I’d like nothing more than to definitively tell you how much a bad hire costs your organization, or to help you quantify the trade-offs of a speedy versus a well-researched hiring decision. Candidly, that was my objective as I set out to write this article. But as I learned, dozens upon dozens of others have worked this ground before me. In fact, the internet is full of articles and blogs explaining the “true” cost of hiring mistakes.
I learned that even the articles chock-full of citations and references really just link to other blogs with the same circular references. The most commonly cited statistic claims a bad hire costs 30% of an employee’s first-year earning potential, a statistic often attributed to a 2003 Department of Labor report. Strangely, after an embarrassingly lengthy search, I have been unable to find the primary source for that figure. I eventually realized it doesn’t matter.
The complicated question of how much a bad hire costs has a simple answer: It’s unique to every organization, and every hiring situation. What’s more important, is that a speedy hiring decision is almost always more expensive than a careful one.
It’s for this reason that Tony Hseih estimated Zappos spent over $100 million on bad hires before he got truly serious about hiring people that were right for Zappos’ unique, customer-centric culture.
It's human nature for managers to drag their feet when they need to fire someone. So instead of hiring quickly and firing slowly, it should really be the reverse. - Tony Hseih - CEO, Zappos
It’s a lot harder to fire someone once they already work for you. Clearly, hiring for technical skill is important. However, hiring for the sole purpose of a skill-fit is a missed opportunity to add value and strengthen an organization’s culture. The cost of a poor hire is never less than the value of insight into a candidate's potential fit.
Though technical skills are important, at least as much effort should be dedicated to measuring candidates' personality, values, and potential impact on an organization's culture. Much like saving today is the only way to prepare for a comfortable retirement tomorrow, selecting employees that fit both its technical and cultural needs allows an organization to thrive in the long-term.