What’s the cost of hiring the wrong person for your business?

Poor hiring decisions are costing small and medium businesses significant amounts of time and money, but even more worrying is the negative effect ‘bad hires’ are having on the clients and other employees in these businesses. 

Earlier this year, in partnership with Performia, SmartCompany surveyed close to 400 small and medium business owners to find out exactly what the costs are of getting recruitment decisions wrong.  

It would come as no surprise to SMEs that the biggest cost from hiring the wrong person is wasted time and money.

Of the businesses surveyed, 48% said one of the key implications of a bad hire was the business had “wasted a lot of time training someone”, while one in three businesses said the bad hire received training and then “didn’t stick around”.

Almost a third of businesses (27%) revealed they had lost money as a consequence of a poor hiring decision.

When it came to terminating someone’s employment, the financial costs increased based on the size of the business. While more than half of businesses with fewer than six employees said they did not incur termination costs, such as paying out annual leave or notice periods, or legal costs, a quarter of businesses with more than six employees estimated their costs from terminating an employee to be between $5,000 and $50,000.

Aside from the financial and time costs, the businesses we spoke to also shed light on some of the less frequently discussed consequences of bringing the wrong people into a business.

A quarter of small and medium businesses felt they were taken advantage of by a bad hire, while 21% reported having lost clients or good staff members because of these people.

Meanwhile, 17% of businesses said other personnel issues involving bullying or destructive behaviour were an issue with bad hires, and this number increased to 25% when respondents were asked about senior management and staff.

Eight percent of the businesses surveyed recalled cases where they had ended up involved in an unfair dismissal claim or a similar situation, while one percent said they ended up in criminal proceedings with a former employee.

When to fire

Many small and medium business owners may know instinctively when it’s time to remove someone from their business, but the decision to terminate someone’s employment is a complex one.

When we asked business owners and managers about what factors influence their decisions around terminating employees, 49% nominated their legal responsibilities as an employer.

Australia’s workplace relations system is notoriously complex and so it makes sense to see this factor at the top of the list, especially given the consequences of unfairly dismissing an employee.

But businesses are also concerned about how quickly or easily they will be able to replace someone (36%), and the cost of replacing someone (27%). Businesses with between six and 50 employees were more likely to be conscious of the difficulties in replacing workers (51%).

Equally, when it comes to deciding whether to fire someone, a third of businesses said they have concern for the employee’s wellbeing.

And then there are the times when it is not always apparent what the best course of action is; 22% of businesses we surveyed said not having enough accurate of compelling evidence to know what the right move is also affects their termination decisions.

Confidence matters

One of the bright spots in the research, however, was the link between confidence levels in recruitment and termination processes.

Overwhelmingly, those business owners who feel confident in their ability to hire good people also feel confident in being able to make decisions, or have conversations, about terminating someone’s employment.

Twenty-one percent of businesses said they feel very confident in their ability to make good hires, and 25% said they feel very equipped to deal with terminations. Almost half of businesses surveyed said they feel moderately confident in the recruitment phase (49%), and 44% said they feel moderately equipped in the termination phase.

But of those who reported feeling confident when hiring, 84% also feel equipped when it comes to removing someone from their business.

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