Pay No Money Now!

May 01, 2002 9:30 PM  By

You won’t need to, because you will pay heavily later if you’re in the habit of using the most common test given to job applicants. You know the one: If they can fog a mirror, they’re hired. This may be a bit of an overstatement, but sadly, just a bit, especially in times of low unemployment when companies are desperate to fill positions. Most businesses don’t think they can afford an extensive hiring process or, more accurately, don’t think that an extensive hiring process is a good investment. I beg to differ.

What Price Folly?
Terminating ▪ Manager time
▪ HR staff time
▪ Terminated employee time
Advertising/recruiting ▪ Cost of advertising
▪ HR staff time
Processing applications/interviewing/screening (typically, multiple applicants per opening) ▪ HR staff time
▪ Cost of screening materials
▪ Manager time
Orientation/training ▪ New hire time
▪ HR staff time
▪ Cost of training material
Reduced output (or increased payroll expense to maintain output) ▪ While position is open
▪ While new hire is training

True, a comprehensive recruiting process takes time and money. But the alternative — a cursory proceeding that results in a large number of bad hires — is much more expensive.

Checks and balances

Many companies seem trapped in a vicious hiring cycle. I hear it all the time: “We can’t spend much on the hiring process, because our turnover is so high and we hire hundreds of people each year.” When I ask why turnover is so high, they tell me that they have a hard time finding people who will stick around and do decent work. It never seems to dawn on them that a desultory hiring procedure may contribute to their turnover problems.

I’ve also heard companies say that they can’t ask job candidates to do more while recruiting is going on (e.g., come back for another interview, take some tests), because the applicants won’t put up with it — they’ll turn around and walk out the door. My response to that is, “Let ‘em walk!” If an applicant won’t cooperate during the employment process or doesn’t appreciate its importance, you don’t want him.

Tab for Turnover
Number of employees 100
Annual turnover 50%
Number of employees lost 50
Avg. turnover cost per employee $500
Total annual cost of turnover $25,000

Companies need to make a conscious decision about how they want to hire. Do they want to be proactive and look for good workers? Or do they want to take a reactive approach and constantly replace missing employees? I contend that the former tactic offers a better return on investment and provides a more solid foundation for the operation as a whole. These are just a few of the dozens of pre-employment screening options available: individual or group interviews; presentations, demos, or job samples; criminal background or open warrant checks; credit checks; driving record checks; employment and education verification; personal reference checks; drug tests; and skill, ability, or personality tests.

Fistful of dollars

How much do bad hires cost? It is difficult to quantify this. Inventory shrinkage, equipment damage, and alienated customers can be tough to nail down. But consider the cost of turnover alone. When you think about all the activities involved in replacing an employee (see table on page 12), it becomes apparent that the process is not simple or cheap, even if you’re using the fog test.

When you attach dollar values to these activities, you discover that filling an entry-level call center or warehouse position probably costs at least $500. So if your turnover rate is high, which is not uncommon in entry-level positions, your turnover expenses are likely to be substantial (see the example above). And the cost of turnover just goes up with positions that require more training and start-up time.

If the price of turnover doesn’t compel you to invest in the hiring process, do it for your managers. They’re the ones that have to deal with or cover for bad hires on a daily basis. Dealing with bad hires can be highly demoralizing. Ways to handle these people come down to the following: Monitor them closely; try to correct their behavior through rewards, punishments, and training; ignore them and hope they go away; transfer them (and their problems) to another department; or fire them (and hope they leave quietly). Or you could, of course, not hire them in the first place.

Still not convinced that you need to invest in a comprehensive recruiting process? Do it for legal liability reasons. Companies are increasingly being sued for the actions of their employees in negligent hiring lawsuits — and one way for you to limit your legal liability is to demonstrate that you did your due diligence (i.e., thoroughly checked out the applicant) while you were hiring him or her.

Michael McIntyre, Ph.D., is a research assistant professor at The University of Tennessee. He can be reached at (865) 974-1664 and mmcintyr@utk.edu.