November 16th, 2016 | Sterling

Calculating the ROI of Background Checks

We have all been there, you are walking around a store and see a great kitchen appliance (or in my case a great sweater) and you think do I really need this? Will it match something else in my closet or will it enhance my culinary skills? Without realizing it, we are calculating the return of the investment of the potential purchase in our heads as we stand staring at the wanted item. We aren’t the only ones doing these calculations. Organizations do this on a daily basis for their expenditures. Everything an organization does comes down to their business goals, values and mission statements (and obviously staying on budget).

In the marketing world, we rely on Key Performance Indicators (KPIs) for the campaigns and content we produce. By following these KPIs we can quantify our return of investment (ROI) for a campaign. In the world of Human Resources, we do the same thing when it comes to background screening. Companies see the perceived value of doing background checks in their hiring process. But is it worth the money that they spend on it? Can you break down that value into monetary terms? When you start to factor in employee turnover, workplace violence and occupational fraud (all items with monetary values), our answer is yes – you can measure it. You can learn more about calculating the value of a background screening here.

Employee Turnover

Employee turnover is the rate at which employees leave an organization, either voluntarily or involuntarily, resulting in an opening that the employer must replace. The true cost of a turnover varies depending on the organization, but it has been estimated to be between 100% and 250% of the employee’s annual salary plus benefits. The factors that contribute to this cost can include off-boarding the departing employee, finding and training a replacement and long-term disruption of the talent pipeline. Employee turnover is the highest in the services industry with an average rate of 35% with the lowest industry turnover rate at 8% in the utilities industry. The key to low turnover is hiring the best candidates and fostering a workplace to keep employees challenged and motivated (while having a little fun along the way). When employees are capable of performing their jobs, are engaged in their companies and are surrounded by like-minded professionals, they are more likely to be satisfied and remain with their employers.

Workplace Violence

Workplace violence might be the harshest consequence of a bad hire and its cost might reach far beyond litigation and company turnover. According to Statistics Canada 2004 General Social Survey on Victimization, approximately 356,000 violent incidents, including sexual assault, robbery and physical assault, occurred in the workplace. Victims of this violence were more likely to work in social assistance, health care, accommodation, food services and education. A criminal record check, employment verification and reference checks with former employers or supervisors can reveal possible risks and help organizations protect their most valuable asset, their workers.

Occupational Fraud

Employee theft and fraud is commonplace and most companies experience it to some degree. It is a global issue costing companies over $3.5 trillion all over the world. The most extreme cases of occupational fraud or theft include corruption, asset misappropriation or financial statement fraud. If a company ran thorough background checks on their employees, some of these issues could be avoided. In fact, for those caught doing fraud, red flags have appeared with 36% of the perpetrators living beyond their means and 27% having financial difficulties. Credit reports are good detectors of these issues, but they must be used cautiously as they should only be run when it is relevant to a particular job, especially those handling cash or in a position of financial authority. Criminal record checks in Canada are also effective for finding past criminal or corrupt activity that is relevant to a position.

What Is Your Background Check ROI?

The first thing to determine when calculating your ROI is to list what costs are relevant to your business including the cost of hiring new employees, what your average background check costs are, the cost of a bad hire and revenue to just name a few. Each company will have different KPIs, costs, strengths and weaknesses and they all must think of when figuring ROI. There are industry average turnover rates, costs and revenue for the company based on data collected in past studies that can help determine your own organization’s ROI.

Once you look at the financial implementations of not doing employee background screening versus having a good screening program in place, you will realize that it is quite financially significant for an organization to have these policies in place. The positive ROI of background screening including customer satisfaction, productivity, better employee performance and an engaged workplace continues to prove that it is an investment worth taking. Find out more on how to calculate the true cost and financial rewards of employee background checks in Calculating the Return of Your Investment in Background Checks.

This publication is for informational purposes only and nothing contained in it should be construed as legal advice. We expressly disclaim any warranty or responsibility for damages arising out this information. We encourage you to consult with legal counsel regarding your specific needs. We do not undertake any duty to update previously posted materials.