The Financial Impact of Hiring the Right People, and the Cost of a Bad Hire

Because recruiters neither make nor sell things, they might struggle to convince colleagues that their work makes a major contribution to the organisation’s success. However, since the staff is usually one of the most important assets in an organisation, selecting the right employees is crucial. This article delves into the financial aspects of hiring the right people.

Key Points:

• There are significant differences between individuals' work performance.
• Because work performance is directly linked to organisational profitability, there are strong financial reasons to invest in solid recruitment processes.
• Factors that can affect organisations financially include productivity and counterproductive work behaviour.

The Value of High-Quality Employees🚀 

Since the success and survival of an organisation depend on its human capital, recruitment is a critical activity in human resource management.^1,2 One of the main factors determining the economic value of personnel selection is the variability of individual work performance.³ If every human behaved and performed exactly the same in the workplace, we could let chance decide which job applicant should be hired. However, there are significant differences between individuals' work performance. 

Studies conducted in the late 20th century found that employees who perform one standard deviation above the average performer financially contribute more to the organisation with a sum corresponding to 40% of the average salary in the work group than an average performer does.^4,5,6 For example, if the average annual salary for a job position is $50,000, an employee who performs one standard deviation above the average performer will annually create an output that is $20,000 higher than the output by an average performer.

The aforementioned estimate is a conservative one. Many of the studies conducted in the 20th century were based on data from blue-collar occupations (e.g., manufacturing jobs), where work performance was assumed to be normally distributed, and where the leeway to exhibit extraordinary performance was limited.

Difference Between Workers in Productivity

In recent years, new studies have shown that in complex jobs, the difference between employees in terms of productivity is even larger than previously estimated. For example, one study analysed data from nearly half a million researchers. Productivity was operationalised as the number of articles published by an author in one of the top five journals in different academic fields. The results showed that the productivity distribution was markedly skewed. The top 1% of researchers produced 10% of the papers, and the top 5% produced 26%. Similar findings were made for other complex occupations.⁷

Because work performance is directly linked to organisational profitability,^3,8 there are strong financial reasons to invest in personnel selection methods that can increase the probability of hiring high performers.

Counterproductive Work Behaviours and Their Consequences❗️ 

Traditionally, work performance measures have focused on how effectively employees perform their tasks (e.g., the number of units produced per shift by a manufacturing worker).⁹ However, there are other aspects of work performance that also affect organisations financially.

One of these aspects is counterproductive work behaviour (CWB). CWB is intentional employee behaviour that violates organisational norms, which could harm the well-being of the organisation and its members.¹⁰ CWB includes behaviours such as stealing money, ignoring safety regulations, falsifying company documents, and sexual harassment.^11,12 Such behaviours have a negative impact on organisations in terms of increased insurance costs, legal fees, and decreased productivity.¹³

Globally, CWB costs billions of dollars each year.¹⁴ To give an example, in 2017, the retail industry in the U.S. lost an estimated $46.8 billion due to inventory shrinkage. The amount lost to employee theft (33.2%) was almost as high as the amount lost to shoplifting (35.7%).¹⁵

The Cost of a Bad Hire💸

Using poor personnel selection methods and hiring people who turn out to be a poor fit can be expensive. The costs of a bad hire include the time managers have to spend training the underperformer, missed business opportunities, and finding a replacement. The U.S. Department of Labor has estimated that a bad hire costs approximately 30% of the employee’s annual salary.¹⁶

Investing in a Solid Recruitment Process  

High-performing individuals who are productive create an output with a much higher economic value compared to others. In complex tasks, such as deciding what products to develop and what markets to target, individual performance can be crucial for the survival of the organisation.

Not only can a solid recruitment process help the organisation hire high-performing individuals. It can also protect the organisation from counterproductive behaviours. Having employees who leak sensitive information, subject others to sexual harassment, or engage in theft can damage the reputation and ruin the organisation financially.

By investing in a solid recruitment process, organisations can mitigate the risk of making bad hiring decisions.

Hope you found the content interesting! For more Recruiting Lab Notes and other interesting guides and reports, visit our blog 👋🏼 

 

References

¹ Breaugh, J. A. (2013). Employee recruitment. Annual Review of Psychology, 64, 389-416.

² Phillips, J. M., & Gully, S. M. (2015). Multilevel and strategic recruiting: Where have we been, where can we go from here?. Journal of Management, 41(5), 1416-1445.

³ Hunter, J. E., Schmidt, F. L., & Judiesch, M. K. (1990). Individual differences in output variability as a function of job complexity. Journal of Applied Psychology, 75(1), 28-42.

⁴ Hunter, J. E., & Schmidt, F. L. (1983). Quantifying the effects of psychological interventions on employee job performance and work-force productivity. American Psychologist, 38(4), 473-478.

⁵ Schmidt, F. L., Hunter, J. E., Outerbridge, A. N., & Trattner, M. H. (1986). The economic impact of job selection methods on size, productivity, and payroll costs of the federal work force: An empirically based demonstration. Personnel Psychology, 39(1), 1-29.

⁶ Schmidt, F. L., Hunter, J. E., & Pearlman, K. (1982). Assessing the economic impact of personnel programs on workforce productivity. Personnel Psychology, 35(2), 333-347.

⁷ O’Boyle Jr, E., & Aguinis, H. (2012). The best and the rest: Revisiting the norm of normality of individual performance. Personnel Psychology, 65(1), 79-119.

⁸ Campbell, J. P., & Wiernik, B. M. (2015). The modeling and assessment of work performance. Annual Review of Organizational Psychology and Organizational Behavior, 2(1), 47-74.

⁹ Devonish, D., & Greenidge, D. (2010). The effect of organizational justice on contextual performance, counterproductive work behaviors, and task performance: Investigating the moderating role of ability-based emotional intelligence. International Journal of Selection and Assessment, 18(1), 75-86.

¹⁰ Sackett, P. R., Berry, C. M., Wiemann, S. A., & Laczo, R. M. (2006). Citizenship and counterproductive behavior: Clarifying relations between the two domains. Human Performance, 19(4), 441-464.

¹¹ Bowling, N. A., & Gruys, M. L. (2010). Overlooked issues in the conceptualization and measurement of counterproductive work behavior. Human Resource Management Review, 20(1), 54-61.

¹² Gruys, M. L., & Sackett, P. R. (2003). Investigating the dimensionality of counterproductive work behavior. International Journal of Selection and Assessment, 11(1), 30-42.

¹³ Penney, L. M., & Spector, P. E. (2005). Job stress, incivility, and counterproductive work behavior (CWB): The moderating role of negative affectivity. Journal of Organizational Behavior: The International Journal of Industrial, Occupational and Organizational Psychology and Behavior, 26(7), 777-796.

¹⁴ Carpenter, N. C., Whitman, D. S., & Amrhein, R. (2021). Unit-level counterproductive work behavior (CWB): A conceptual review and quantitative summary. Journal of Management, 47(6), 1498-1527.

¹⁵ Korgaonkar, P., Becerra, E. P., Mangleburg, T., & Bilgihan, A. (2021). Retail employee theft: When retail security alone is not enough. Psychology & Marketing, 38(5), 721-734.

¹⁶ Abbasi, S. M., & Hollman, K. W. (2000). Turnover: The real bottom line. Public Personnel Management, 29(3), 333-342.