The True Cost of a Bad Hire (and How to Avoid It)

The cost of a bad hire can quickly add up. Yes, you’ll waste a few paychecks on bad hiring decisions: recruiting expenses, onboarding time, and management hours invested in the wrong person. Yet the true cost of a bad hire goes far beyond these direct costs.

Beyond the thousands or even tens of thousands of dollars lost on bad hires are costs that are harder to quantify and are possibly even more financially ruinous in the long run. The cost of bad hires extends to lost productivity and lower team morale.

The negative energy from one bad hire can also damage customer relationships and interactions with suppliers and partners. The harm to your company’s reputation can be significant.

With understanding the cost of a bad hire comes the necessity of avoiding bad hires in the first place. Thankfully, it doesn’t just come down to luck. You can use our free bad hire cost calculator for insights that will help you make better hiring decisions, leading to happier teams and a healthier bottom line.

What is the real cost of a bad hire?

Arriving at a number that reflects the true cost of a bad hire isn’t easy. So much depends on the role, industry, and how long the bad employee stays on, not to mention the damage they can do to productivity, morale, and your company's reputation.

Some experts have pegged the average cost of a bad hire at 30% of the annual salary of that employee, averaging $14,900 per bad hire. In some industries or companies with higher-level employees, the cost can reach $240,000.

Data from the Society for Human Resource Management (SHRM) puts the average hiring cost at $4,700. The actual number can be three times the annual salary of a given hire. The SHRM cites a job that pays $60,000 may end up costing you $180,000 if you hire the wrong person.

They suggest 30% to 40% of hiring costs are hard costs, while the remaining 60% are harder to quantify. These include the impact on productivity, time spent coaching and managing a new employee, morale issues, workload and burnout, errors and work quality problems, delays and missed opportunities, and reputational damage.

Dealing with the fallout of a bad hire and starting the hiring and training process over is both time-consuming and expensive.

Why bad hires are so expensive

The cost of a bad hire is likely higher than you might expect. A bad hire doesn’t just affect one role or job; it can potentially impact your whole organization, extend to company relationships, and even damage your reputation.

A simple performance issue can lead to wasted time, the need for rework, missed targets, strained teams, and morale problems. Inconsistent quality and poor service can lead to customer losses and revenue declines. You may miss opportunities as managers are diverted from strategic work to damage control.

Together, the direct and indirect costs are a serious drain on your time, finances, and business momentum. Here are details on the cost of bad hires.

Calculating the cost of bad hires

The cost of a bad hire statistics only tell part of the story. We’ve broken them into the direct costs that represent tangible out-of-pocket expenses and the indirect costs of bad hiring decisions. Together, they provide insight into the real cost of hiring the wrong person.

Direct costs

Direct costs of bad hires include the measurable expenses of hiring and onboarding a new employee. These costs are typically accounted for in budgeting and financial reporting. If you mis-hire for a position, you’ll incur these costs again when hiring another person for the role.

• Job advertisement fees
• Candidate assessment and screening costs
• Recruitment and employer branding
• Hiring manager’s salaries or the contractual costs of a recruitment agency, external recruiter, or staffing firm
• Travel expenses incurred while recruiting new employees
• Signing bonuses, relocation packages, or incentives
• Salary or wages paid before termination
• Employee benefits
• Payroll taxes
• Training programs and onboarding materials
• Equipment setup costs, uniforms, tools, etc.
• Severance pay, unemployment claims, and legal costs

Indirect costs

The indirect costs of a bad hire are often more far-reaching and damaging than direct costs. They’re also easy to underestimate because they don’t appear as budget line items.

• Productivity and performance costs: One employee with poor performance could prevent your company from meeting sales or revenue goals or project milestones.
• Manager and leadership time: Supervisors must divert time and attention to coaching, correcting mistakes, managing conflict, or documenting performance issues versus activities that contribute to the business.
• Quality and rework costs: Errors made by bad hires often require rework, additional approvals, or corrective action, slowing teams down and putting additional burdens on others.
• Team morale, retention, and culture: Low-performing employees force others to pick up the slack. The negative impact can cause bad attitudes and resentment.
• Opportunity cost: Time spent fixing hiring mistakes slows growth, stymies innovation, and puts strategic projects at risk.
• Cultural impact: A single bad hire can poison your organization, undermining values, hurting interpersonal relationships, and weakening accountability.
• Reputational damage: Having the wrong person in a role can affect your brand. Negative reviews sparked by bad hires can be devastating. Relations with partners and suppliers can also suffer.

Cost of a bad hire calculator

Use the cost of a bad hire calculator below to estimate the total impact of a single mis-hire. This will help you get a realistic view of how the cost of bad hires affects your business.

Using the calculator is easy. Enter the employee’s salary, how long they stayed in the role, and the recruiting and training costs you incurred. The calculator will give you an estimate of the revenue lost, productivity decline, and cost of team turnover that you can attribute to the bad hire. You’ll get a clear picture of the financial stakes and the benefits of avoiding bad hires in the future.

While this tool can’t give you a precise number as to the cost of bad hires, it gives you an estimate to use as a benchmark to promote smarter hiring processes and decision-making. Below, we’ll share insights on how to avoid the cost of a bad hire in the first place.

Recognizing a bad hire

A bad hire is a person who turns out to be a poor fit for the role or organization. The mismatch can show up in several ways. You may uncover a skill gap, performance may be inconsistent, or you may see behaviors that clash with company values and affect teamwork.

The early warning signs of a mis-hire usually appear within the first few months. Common new employee red flags include missed deadlines, failure to handle core responsibilities, resistance to feedback, strained relationships between teams, and conflicts with customers or partners. It’s vital that you recognize a bad hire early to adjust roles, provide support, or remove them in a timely manner. The sooner you identify an issue and address it, the better your chance of limiting the cost of a bad hire.

Why do mis-hires happen, and how can you avoid them?

Bad hires aren’t the result of bad luck. Instead, shortcomings in the hiring process are what contribute to the risk of a mismatch. Below, we provide details on common hiring process deficiencies and share ways you can improve each step to avoid bad hires. With insight into what can go wrong and how to address preventable mistakes, you’ll improve your chances of hiring high performers who fit well in your organization.

Common reasons for bad hires

We’ve seen how adding a bad hire to your team can damage your company in multiple ways. You can save the cost of hiring the wrong person by improving the processes that lead to bad hiring decisions.

• Interviewer bias: The hiring manager may connect with a candidate and get a strong positive gut feeling that gets in the way of an objective evaluation. Feeling partial to a likeable candidate may lead an interviewer to overlook limits to their qualifications.
• Poorly defined job requirements: Without clearly detailing the necessary skills, experience, and qualifications, evaluating candidates for fit is challenging.
• Candidate misrepresentation: Some job applicants exaggerate their skills, pad their experience, or claim dubious accomplishments. It’s vital to include practical assessments, run background checks, and check references.
• Poor interview process: Asking the right questions and moving beyond superficial ones will help you uncover character, learn how a candidate thinks, and gain insight into future behavior. Formalizing the interview process ensures consistency across candidates.
• Limited information about the candidate: If you don’t run skill tests, administer behavioral assessments, or do proper background checks, decision-makers won’t have enough information to fully or fairly compare candidates.

How to avoid bad hires

Saving your company the cost of a bad hire isn’t complicated or burdensome. With a disciplined and repeatable approach, you can consistently hire great people. Follow these three steps:

1. Prepare: Detail the skills, experience, personality, and attitude the role requires.
2. Assess: Use research, diagnostic tests, and upgraded interview techniques to determine if a candidate is a good fit, and don’t skip background checks.
3. Act: Quality talent is in high demand. Be prepared to make a competitive offer as soon as you find the right candidate.

By following these steps, you can find the best employees for open positions and set up your company for success. Let’s get started.

9 tips to avoid hiring the wrong person

It’s easy and costly to make a mistake, according to Ray Dalio, founder of Bridgewater Associates: “Hire right, because the penalties of hiring wrong are huge.”

Here are nine ways to avoid the penalties of hiring wrong.

1. Define your ideal candidate and be clear about your company needs

Before you narrow down your list of job applicants or start holding interviews, it’s best to develop an effective job description and a list of characteristics desired in a potential employee. What might make a candidate a bad hire for your company? Will the right person be introverted or extroverted? Do they see the big picture, or are they a detail-oriented person?

For inspiration, look at the people in your workplace who are successful in the same position. If you’re hiring for a sales position, consider the personality traits of your top salespeople. What do they have in common? Depending on your industry, your top salespeople may be confident, engaging, and energetic enough to sell cars or empathetic and soft-spoken enough to serve mourners. Defining specific personality traits for each role helps you avoid disruptive or jarring personalities.

If you’re hiring an employee to fill a new role, look at similar job descriptions online and see what other companies seek out. This can help you formulate your ideal employee hiring profile.

2. Assess your existing hiring process and learn from past mistakes

If you’re spending a lot of time interviewing people you’d never hire, or worse, hiring the wrong people, your hiring process is the problem. You may be spending so much time trying to narrow down a large applicant pool using traditional criteria like experience and education that you miss the critical qualities.

With the ideal candidate in mind, Hire Success^® can administer the Pre-Employment Personality Test and Pre-Employment Honesty and Integrity Test to narrow the applicant pool down to likely candidates by learning attributes you can’t uncover with a resume.

3. Use all available candidate sources to attract top talent

Posting on a general job board can bring in plenty of applicants, but if you want to attract top talent, consider widening your search. Hiring recruiters is an effective way to lure employed candidates who aren’t actively looking for a new job.

To attract candidates with specialized skills, place ads on industry-specific job boards. You may also find great candidates by asking your top-performing employees in the same department to spread the word through social media.

Another often overlooked possibility is promoting from within. The stellar talent you need might be right under your nose. Promotion from within is great for your company image.

4. Look for both technical and cultural fit

You need to hire people with the right skillset, but in today’s marketplace, company culture is more important than ever before. Consumers want to do business with companies they can relate to and expect certain behavior and values from everyone associated with your company.

Make sure new employees have the right personality type, fit your company's image, and uphold your values. One employee with questionable social media posts could undermine all the work you’ve done to build your brand. Personality testing can help you objectively assess cultural fit.

5. Don’t overestimate experience on account of future potential and attitude

While most employers value experience, this isn’t always a good predictor of future performance. The number of years performing a job or the number of jobs a candidate has had don’t indicate the quality of their work. Workers can easily be mediocre at their jobs for decades. Some of the more charming or connected personalities can even fail upwards.

Conversely, an employee with great potential may have been passed over or assigned to tasks well below their skill level and appear to be mediocre when they’re not. A new hire with a great attitude and the aptitude for the job may be a much better fit than an experienced person with poor performance.

6. Verify candidate’s information, dig into the gaps, and ask for proof if needed

Job seekers may lie or exaggerate on their applications. During the interview process, it’s important to verify all the information they give you, and, if there are gaps or omissions, find out why. While your job description may put a higher value on experience or knowledge over academics, you’ll want to know if a potential hire lied.

Candidates might also exaggerate their skills. That’s where Hire Success^®' aptitude and skills tests come into play. Hire Success® can assess the true potential of your prospective hires.

7. Don’t overlook candidate red flags, and follow your gut

In the rush to hire, interviewers often ignore red flags. Be aware of the signals candidates are sending, and explore any concerns ahead of time. If you sense something isn’t right, trust your instincts. The following examples could be signs of a bad candidate:

• They don’t ask any questions: Lack of questions could indicate disinterest, arrogance, or fear that questions will reveal weaknesses.
• They avoid discussing any flaws: Refusing to acknowledge weaknesses could indicate lack of humility or self-awareness.
• They arrive late to the interview: While there are many legitimate reasons to be late, it may indicate disorganization.
• They’re unprepared for the interview: A good candidate will understand the position, be qualified, and know at least the basics about the company.
• They don’t seem adaptable: If you mention additional job responsibilities and they object, they may never be able to adapt to change.

8. Give yourself enough time to make a final hiring decision

It’s more important to hire the right person than to fill the role with just anybody. Given the cost of a bad hire and how devastating a toxic personality can be to your team, it’s better to take the time you need to attract, identify, vet, interview, and onboard the right new team member rather than settle for someone with the right technical skills.

Don’t forget to perform reference checks and background verification to avoid any unwanted surprises down the road.

9. Set clear expectations for the hire, and define next steps

You can’t expect new employees to hit the ground running without instructions. During the hiring process, you should learn their strengths and weaknesses. Before hiring is finalized, make sure they understand what the job entails and what comes next. Walk them through the onboarding and training process.

What to do when you’ve made a bad hire

Even with the best hiring process, you may still make a bad hire. Moving quickly can limit the cost and disruption of hiring the wrong person. Performance issues, strains on other team members, missed goals, and damaged relationships compound over time.

Planning a response when a new hire isn’t working out minimizes the negative fall out. Below are practical steps you can take to regain momentum and quickly recover from a hiring mistake.

1. Give focused feedback or reassign the hire

Employees don't always underperform as a result of poor hiring decisions. Focused feedback directs attention to the most important aspect of an employee’s areas for improvement. With extra training or a different job assignment, you may be able to save a disappointing hire.

If reassignment is possible, you might mitigate financial losses by not having to go through the hiring process again for that post. The investments made in hiring and training the employee won’t be entirely wasted.

2. Identify the current and future expenses of keeping a bad hire

Poor sales and missed goals and deadlines are just some examples of the cost of hiring the wrong person. Every missed sale, goal, or deadline risks revenue loss and compounds further problems. Before your losses escalate, it’s wise to assess the situation, then take action. Your choices are to retrain, reassign, or cut your losses and the toxic hire.

3. Prepare an exit plan

When conducting interviews and making hiring decisions, choose a backup candidate or two in case your initial choice doesn’t work out. If you can identify a bad hire quickly and act decisively, having a second-choice candidate already in mind speeds up the replacement process.

4. Fire gracefully

If you have to fire a bad hire, it's going to be an uncomfortable conversation. The new employee probably knows their performance isn’t up to par but may be defensive or even accusatory. The best way to handle the issue is kindly but firmly. You may be surprised; the employee might have ideas about how they can improve or what training they need to get better results.

There are a few ways to soften the blow. Tell them how impressed you were with their interview and qualifications and explain that they simply weren’t a good fit for the team. Tell them that the job description calls for some other qualification. Ask them about their experience and invite input on how the team can improve.

Treating an exiting employee with dignity is good for your brand image. Make it a positive conversation and offer to provide a reference.

Of course, hiring the right person in the first place is the ideal situation, but things don’t always go as planned.

How Hire Success^® can help limit your hiring expenses

Given the high cost of hiring the wrong person, it’s worth investing in the hiring process to avoid recruitment mistakes. Finding the right person the first time is a science and art.

Using scientifically backed personality and aptitude tests, Hire Success^® cuts down the cost of hiring by identifying candidates with preferred traits and skills.

Hire Success^® then produces personalized questions for each candidate, helping you get to know your potential employee better in the limited interview time. This information identifies candidates who tick all the boxes and helps you get a better idea of which applicants will shine.