The Cost of Bad HR - Human Resources Hero

The Cost of Bad HR

Did you know that, on average, small businesses spend approximately $2,966 per employee on human resources each year? That’s nearly $150,000 for a company with 50 employees! This number includes money spent on payroll management, technology, training, recruiting, and other essentials of running the HR department in an organization but excludes the cost of any benefits like retirement or insurance premiums. And while that per employee figure goes down, the larger the company gets, even the biggest companies (those with more than 2500 employees) spend about $650 on HR for every single employee.

Reasons why businesses don’t invest in HR

Clearly, it takes a lot of money and time to manage HR in any business properly. And many small business owners may look to cut costs in this critical department; after all, human resources, unlike the sales, marketing or production departments in a business does little to bring revenue to the company or produce tangible business assets.

In fact, the HR department often gets overlooked in smaller business with many companies with less than 100 employees spending very little on things like training, HR software and HR department salaries. But is under funding HR in your business worth the risk?

While it’s true that the costs associated with proper human capital management are significant, there are other costs that may come up if you don’t give the HR department in your business the attention it deserves. The most imposing of these costs is increased employee turnover.

The $1 trillion mistake

According to a 2019 Gallup poll, turnover cost US employers over 1Trillion dollars every year – nearly 10 times what is spent on human resources over the same period. When you break that number down, the cost of recruiting, interviewing, onboarding, and training a new employee, along with lost productivity, adds up to about a third of that employee’s first-year salary.

Companies that under invest in HR see much higher turnover rates than companies that prioritize human capital management. This is evidenced by the preventable factors that contribute to employees leaving their jobs, which include:

  • Inflexible work arrangements
  • Poor management
  • Disengagement from the job
  • Feelings of being undervalued and/or underutilized
  • Being over-stressed or burned out
  • Few opportunities for advancement
  • Poor company culture

Because turnover is such a big problem (27% of employees voluntarily quit their jobs in 2019), dozens of studies have been done on why employees quit. These reasons are still consistently in the top 10, and all of them can be vastly improved with proper human capital management.

In addition to potentially reducing the biggest factors associated with turnover, properly investing in human capital management can also insulate your business from other risks such as employee lawsuits and fines and penalties due to labor law and safety violations, which can be significant.

Other mistakes to avoid

An employee will sue about 10% of businesses at some point, and the average cost of a lawsuit for an employer is over $160,000. This high cost is partially because, even if your company wins the suit, you still will need to pay legal fees for an attorney to defend you. Properly investing in HR for your business will reduce (but not eliminate) the potential for one of these lawsuits. But more importantly, it will put your business in a much better place to defend against a suit, reducing costs and increasing the likelihood of dismissal or a favorable settlement for your business.

Investing in a safety program will also greatly reduce the potential for relieving safety violations and fines. It will lower the cost of worker’s compensation insurance at your business over time. In 2019 alone, the Occupational Safety and Health Administration (OSHA) fined over 14,000 businesses a combined total of $459,566,000 for safety violations that were largely preventable by having and following a safety program. This is money that should have stayed in these companies but instead went towards penalties.

There are numerous other examples of how under-investing in human resources can cost you thousands of dollars a year. You can learn more about these mistakes and how to address them by watching our free recorded webinar, The Top HR Mistakes to Avoid.

Being proactive brings stability and scalability

When you properly fund your HR department, putting the proper technology, services, time, and knowledge into reducing things like employee turnover and easy to avoid human capital management mistakes, you save your business thousands of dollars a year. And while the amount of money saved is not something that can be completely quantified, proactively managing HR allows you to assign a fixed and predictable cost to human capital management. This gives your business the stability it needs to manage cash flow and scale effectively without being derailed by turnover, lawsuits, and fines that are unexpected and exponentially more expensive than investing in HR on the front end.


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