Employment Background Checks: The Surprisingly High ROI

A thorough background check is one of the best investments an employer can make. Let’s see why.

Information Required to Understand Employment Background Check ROI

  1. Various studies have concluded that the cost of a bad hire is between 100% and 500% of an employee’s annual salary. This is easy to understand when one considers the costs of a bad hire: the direct and indirect cost of recruiting and hiring; the direct and indirect training cost; the wasted wages and benefits. The management, administrative and legal costs of a bad hire can also be staggering. Plus, consider the direct and indirect cost of damage to or loss of funds, materials, equipment, work environment, customer goodwill, and employer reputation.
  2. 25% to 30% of thorough background checks uncover issues that an employer needs to review before proceeding with hiring.
  3. 1/3 to 1/2 of the applicants with problem background checks are not hired, presumably because of the likelihood that they would be bad hires. This means that between 8.3% (1/3 of 25%) to 15% (1/2 of 30%) of applicants are not hired due to problems discovered in a thorough background check.
  4. A quality thorough background check typically costs $150 to $300 each, depending on the position and the applicant’s history.

A Sample Background Check ROI Calculation

Assumptions:

  1. A salary of $50,000/year.
  2. The cost of a bad hire is 100% of annual salary (from a range of 100% to 500%). The typical cost of a bad hire would be $50,000 for this position.
  3. 10% of final applicants are not hired because of problems discovered in background checks (from a range of 8% to 15%).
  4. $250 is the cost of a thorough background check (from a range of $150 to $300).

The Calculation:

Cost avoidance for each thorough background check =
Salary * Typical cost of a bad hire (% of annual salary)
* % Applicants not hired

or
$50,000 * 100% * 10% = $5,000

 ROI = Costs avoided / Cost of thorough Background Check
or
$5,000 / $250 = 2,000%

Conclusion:

Therefore, for this position, the employer would expect, on average to avoid $5,000 (10% of $50,000) of bad hire costs with each $250 thorough background check. That is a whopping 2,000% ROI!

Summary:

Day in and day out, employers conducting quality thorough background checks realize tremendous returns on their background check investment. For information on how to build a thorough and comprehensive background check, see Comprehensive Background Checks.

Related Resources:

  1. The Growing Trend to Thorough Background Checks
  2. Comprehensive Background Check: The Best Background Check
  3. How to Conduct a Background Check 
  4. Background Check Statistics

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