The High Cost of a Bad Hire

By PHM Search | Simply Technical
July 11, 2019

The proverbial bad apple. Seemingly so benign, yet when left to rot, will spoil the entire bunch. Hiring mistakes happen. While great efforts are often made to find the perfect employee for a given job, sometimes it just doesn’t work out. The Harvard Business Review points out that as much as 80% of employee turnover is due to bad hiring decisions. Unfortunately, these mistakes have a high price for your bottom line and organizational climate.

The Costs.

Many factors determine the cost of a bad hire. There is the time spent advertising or posting, sourcing, interviewing, hiring, training and onboarding, salary and benefits and then the time to source, hire and onboard their replacement. There is also the lost investment of time spent by those employees involved in the onboarding process. On average, your cost to hire is the total amount spent annually on recruitment divided by the total number of hires that year. These costs go up significantly the more senior the person’s position, and the longer their time of employment. Moreover, the size of the business impacts the amount a bad hire can cost. Small businesses actually spend more on training and their overall cost of a bad hire is greater than big business. Perhaps this is why 42% of small business owners claimed hiring new employees is their biggest challenge.

The Price Tag.

While there are varying statistics on the exact cost to a company’s bottom line, most HR and hiring managers put the number in the “thousands of dollars”. Some would argue this is a very conservative amount. Jorgen Sundberg, CEO of Humanlinks, puts the cost of onboarding an employee at $240,000, and the U.S Department of labour puts the price of a bad hire at 30% of the employee’s first year earnings.

In a CareerBuilder study, 41% of companies report a price tag of $25,000 or higher attributed to making a single bad hire, while a quarter of businesses put that cost at over $50,0000. According to Keeping the People Who Keep You In Business (Leigh Branham) the cost of losing an employee can range from 25% to 200% of that employee’s salary. Furthermore, when it comes to training (just one part of this cost), is more expensive in specialized fields (like engineering for example), an additional 21.4% will need to be spent on finding a bad hire replacement.

Another way to measure the cost of a bad hire is by looking at revenue generated per employee. If you estimate a 40% profit margin per hire and the revenue per employee is $200,000, then the profit margin per hire is $80,000. However, also consider that an employee in the top 25% of the talent pool brings in an additional 25% in profit, totalling an amount of $130,000. Therefore, the cost of a bad hire is $50,000.

Regardless of the context in which you measure the loss, your bottom line takes a significant hit. To determine this amount for your company, use this tool to calculate the cost of your bad hire.

A Tale of Two CEOs.

Zappos’ CEO Tony Hsieh estimated that bad hires had cost his company around $100M. While this amount seems exorbitant, if you consider the 30% cost of a $50,000 employee, the amount adds up quickly. To remedy this situation, he developed The Offer and pays up to $2000 to bad hires to leave in their first week, if they are not working out. He has done the math and sees this as a much smaller price to pay than their training, severance, potential legal costs and the cost of finding their replacement. This may be a growing trend. In 2014 Jeff Bezos, Amazon founder and CEO, unveiled his Pay to Quit program where each employee gets the offer once a year. Initially he offers $2,000 and that number increases by $1,000 annually, up to a maximum of $5,000. As Bezos notes in his letter, “In the long run, an employee staying somewhere they don’t want to be isn’t healthy for the employee or the company.”

Beyond the Price Tag.

Lost productivity may be the hardest cost to quantify, but the biggest cost of a bad hire. Just one bad hire added to a high performing team can lower productivity by 30-40%. In fact 34% of CFO’s agreed that bad hires cost them productivity and managers spent 17% of their time supervising poorly performing employees. Linked intricately with this cost is the overall drop in morale that seeps in quietly and festers as resentment by those employees forced to pick up the slack for the bad hire’s inadequacies. According to one survey, 95% of supervisors questioned said that hiring the wrong person has a strong impact on the morale of the team and 35% of them claimed the impact was negative.

The Why.

There are several reasons why a bad hire can claim their stake in your company’s coffers, but the most prevalent seems to be a perceived lack of time. As the recruiting and hiring process can be tedious, many employers simply want to fill the position and often they are rushed to do so. In fact, 43% say they need to fill a position quickly. “Too often, hiring managers are so anxious to (just) put a body in the chair that they overlook candidates’ flaws and end up hiring someone who really doesn’t meet the needs of the job,” says CareerBuilder. On top of that, more than 22% of respondents said they lacked the skills to interview and hire people effectively!

The Fix.

An outside agency can greatly reduce the risk of making a bad hire. They have access to large pools of talent, in specialized divisions, and will guarantee their hire with a replacement. The right hire is critical, if you’d like to know how PHM Search | Simply Technical has been finding that perfect fit and keeping the bad apples out of your bunch then contact us and we’d be happy to help!