Authored By W.Barry Nixon, SHRM- CMP
At some point in time, employers will question the value of background checks. It is important for private investigators to better understand the cost benefit of conducting background checks so that, should the question arise, financial information and qualitative factors are readily available.
Common behaviors and situations employers seek to avoid include: Occupational fraud, including identity theft, stealing property and goods, embezzlement, information theft and occupational espionage; safety accidents and employee injuries; aggressive persons who could commit workplace violence or create a hostile environment; the expense and liability associated with negligent hiring lawsuits; verification of licenses, credentials and education; violations of immigration laws; high turnover; and extreme employee events.
There also is the impact of the bad hire on the rest of the team, said Dr. Janice Presser, adding that the better the existing team, the worse the damage will be.
And, finally, there is the adverse impact on present and future stakeholders.
Use of background screening helps ensure that the company finds the best employees for open positions and to help weed out potential problematic applicants. It is estimated that 90% of employers are conducting some form of background checks, but with a need for many to cut costs and save time, screening is given a second look.
Always consider the Return on Investment when deciding whether to conduct a proper background screening. This simple ratio is used by companies who are considering a major expenditure and includes dividing the Return by the cost of the Investment. For instance, an investment that is estimated as having probable returns of $10 million from a planned investment of $1 million would be said to have a favorable ROI of 9 to 1. It is important to use quality assumptions and accurate data to property estimate the potential return and likely required investment. Information that should be considered to calculate background check ROI includes: The cost of a bad hire is between 50% and 100%; 25% to 30% of thorough background checks uncover issues that an employer needs to review before proceeding; 1/3 to 1/2 of the applicants with problem background checks are not hired; a quality background check typically costs $150 to $300 each, depending on the position and applicant’s history.
As an example, assume:
1. A salary of $50,000/year.
2. The average cost of a bad hire is 100% of annual salary. Typical cost of a bad hire for this position would be $50,000.
3. An average of 10% of final applicants are not hired because of discovered problems.
4. $250 is the average cost of a thorough background check.
Calculate by $50,000 X 100% X 10% = $5,000. The ROI = Costs awarded / Cost of thorough background check OR $5,000 / $250 = 2,000%.
In summary, this employer would expect to avoid $5,000 of bad hire cost and an ROI of 2,000%! It is clear and definite that when you help an organization avoid hiring a problem employee it can save them a large amount of money, but it is up to the investigator to educate clients on this valuable screening information.