Hiring the wrong person can cost businesses up to three times the new employee's salary, writes Gabrielle Monaghan

While Ireland's tight labour market is prompting companies to scramble for available talent, many small and medium-sized enterprises (SMEs) with limited HR experience are haemorrhaging money by hiring the wrong people, a recruitment expert has warned.

Research has shown that the cost of a bad hire can be as much as three times the new employee's salary, according to Paul Mullan, director and founder of Measurability, a new consultancy that uses psychometric assessment to help organisations recruit staff.

Too many small businesses are employing people based on short, unstructured interviews and bland references, a recruitment strategy that has a failure rate of up to 50 per cent, says Mullan, who also helped set up Eden Recruitment, one of Ireland's leading recruitment agencies, in 1999.

According to the Handbook of Industrial and Organisational Psychology, however, as few as one in 14 job candidates hired during an interview process are successful.

"If companies just use interviews alone, their success rate is not much better than flipping a coin," Mullan says. "Multinationals are so large that they can absorb a bad hire, whereas a couple of bad hires could shut down a small company."

The Small Firms Association estimates that SMEs are set to create up to 1,000 new jobs a week this year. According to Mullan's calculations, 400-500 of those positions probably won't work out. And about 60 per cent of Irish companies fall into the SME category.

While large companies typically have separate HR departments, interviews conducted at SMEs are primarily carried out by the owner, manager or a top executive. They tend to have poor recruitment skills and use unstructured interviews.

This selection process has been described as an "actor versus actor" game by recruitment experts, Mullan says.

Candidates try to act like the person they think managers want to hire, and managers try to appear like the firm they think candidates want to work for. Candidates routinely stretch the truth during interviews in a bid to present themselves in the best light, while companies also exaggerate by only putting forward the organisation's positive aspects to keep job candidates interested.

Indeed, 94 per cent of HR directors in the UK think prospective employees will "occasionally" or "often" bend the truth in interviews, according to research released earlier this year by SHL, the world's largest provider of workplace assessment.

The UK population agreed with that statement, with more than half of people saying they thought it was acceptable to tell a few white lies when chasing a job.

The top lie was related to their skills and qualifications, while others admitted either omitting essential information or exaggerating their current salary. Even one in 10 HR directors said they had exaggerated during the interview to get their job.

Lying has become something of a minefield for HR directors, with almost half agreeing that it is impossible to tell whether candidates are bending the truth in interviews. Some 74 per cent said they would try to identify those being economical with the truth by asking questions, while two-thirds said they relied on intuition and body language.

"Because we have full employment now, some SMEs will even hire someone on the spot because they liked them during the interview," Mullan says.

"When I speak to clients, I realise that a lot of people bury their head in the sand about this issue."

When calculating the cost of a bad hire, small companies typically just count the expense of advertising the position and the recruitment agency's fee, he says. But the cost can amount to three times an annual salary because of the time the company's managers and other staff invested in hiring and training the employee, and the salary and benefits paid to the employee during their time with the company.

The hidden costs of hiring the wrong candidate include time wasted managing their poor performance, the negative effect on co-workers' productivity and morale, lost customers and potential sales due to mishandling by the employee, compensation, severance or legal fees, and the cost of recruiting and training a replacement.

"Consider the damage to a company if you hired the wrong account manager and he messed up your biggest client and the company lost the business," Mullan says. "You then have to go and hire and train another individual."

A combination of competency-based interviews and objective assessment techniques is the best way of predicting a candidate's suitability for a job, he says, citing a review of 85 years' worth of research into the validity of different recruitment methods.

As a result, more large companies are turning to psychometric assessment to find the right employees.

Some 80 per cent of the companies listed on the FTSE 100 used some kind of psychometric evaluation last year, a survey carried out by Test Agency Hogrefe found.

Mullan polled 100 of the biggest companies in Ireland and discovered that 64 of them use psychometric testing.

Measurability, founded three months ago, provides SMEs with assessments such as ability testing, personality and motivational questionnaires to help companies cut down on recruitment time, avoid bad hires and reduce staff turnover.

"I can do as much or as little for an organisation as they want," Mullan says. "For one company, I'm designing their whole recruitment process, ranging from finding out what skills they are looking to hire right through to assessing these skills and creating an interview structure for them."

He continues: "For other organisations, I simply supply online personality questionnaires. If someone is going for an interview today, they can complete the questionnaire and I can have a report on that person by the following morning.

"The type of questionnaire I use has a consistency gauge in it. If the consistency gauge is low, it may be that the candidate tried to manipulate the information."

After leaving Eden Recruitment, Mullan gained experience in psychometric assessment by working for SHL in the UK. SHL, whose shares are listed on the London Stock Exchange, employs more than 250 psychologists and provides over 5,500 clients with psychometric tools and techniques, training and consultancy services.

As the popularity of psychometric testing grows among companies, so too does SHL's earnings - the organisation reported a 36 per cent gain in pretax profit for last year.

Mullan, though, says the cost to SMEs of using Measurability to recruit staff is "minimal" compared to the expense of hiring the wrong employee.