The Full Cost of a Bad Hire for Your Business

Hire Success
Hire Success

Hiring the right person for the job can enhance your bottom line, but hiring the wrong person can devastate your business. When the cost of a bad hire becomes too high, the hiring process repeats, often with similar results.

The full cost of hiring the wrong candidate is beyond low sales. A bad hire can lower employee morale and actively cost you money with poor performance. Factor in the cost of recruiting, assessing candidates, interviewing, hiring, onboarding new employees and the whole experience can become a costly nightmare.

What happens when you hire the wrong person?

It might take some time to realize you’ve hired the wrong person, but you’ll eventually discover the employee isn’t the right fit. You might see mistakes on the job or personality conflicts with colleagues or clients. If the signs are subtle, you and your managers might be in denial. Who wants to admit they’ve chosen the wrong person and go through the hiring process again?

Some managers prefer to keep an underperforming employee to avoid the hassle of starting over the hiring process. However, keeping a bad hire ends up costing a lot more time and money than you may think.

How much can a bad employee cost you?

When you hire the wrong person for a job, it creates a ripple effect of inter-organizational problems.

Some of the most common problems are easily identifiable. For example, a dip in sales is often the trademark of a bad hire. Not all costs are easily measurable, though. A bad employee can affect the morale and productivity of your entire staff, upset loyal customers, and cause catastrophic indirect disruptions.

Here are some of the most common consequences and costs of having bad hiring strategies at your business:

1. Hiring costs

How a bad hire can affect your business

Zippia reports that the average cost per hire in 2021 was $4,425, with the median cost at $1,633. In other words, the more a position pays, the more hiring costs. CFO cost far more to hire than officials in middle management. Either way, hiring a new employee is a major investment.

Depending on industry and location, the average time to fill a vacancy is between 36 and 42 days. That’s more than a month short-staffed, potentially affecting every aspect of the business.

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

2. Low employee productivity

When an employee fails to meet job expectations, it affects the entire organization's goals.

One employee turning in poor performance could prevent your company from meeting sales or revenue goals or meeting project milestones. Low performing employees force others to pick up the slack. To meet departmental goals, they must spend time correcting errors or helping to get another employee’s work done.

This has a cascading failure effect, limiting the potential and productivity of the remaining team.

3. Wasted time spent recruiting and training

When you add the cost of hiring a new employee to the cost of training, it’s a considerable expense. The time spent training a newly hired employee is an investment in both the business and the person. The average new start takes 3 months to become fully productive.

A hire without training or experience might cost less financially, but will require a longer adjustment period. Some applicants might look great on paper, but have the personality of a wet napkin. If they don’t fit your team’s dynamic collaboration, they won’t get the job done.

Hiring is a two-way street. This is a job-seeker’s market. If they don’t like your company or don’t fit in with your team, they are quick to quit. There’s even a name for the record number of people leaving their jobs: the Great Resignation Wave.

Hiring and training a new person who ultimately doesn’t fit with your team, only for them to take those skills elsewhere is disappointing, frustrating and expensive. To prevent wasting time and money on a bad hire, it’s critical to know what hiring mistakes to avoid.

4. Low employee morale

Staff turnover has a detrimental effect on employee morale and recruitment. Every remaining team member has to pick up the slack, working extra hours to cover the extra workload. The negative impact can cause bad attitudes and resentment.

Equally, a bad fit with the existing team can detriment team spirit. A toxic work environment leads to increased sick leave and lowers overall productivity significantly.

High turnover can also affect the quality of prospective talent. With social media, news of a toxic work environment spreads quickly.

5. Damage to your company’s reputation

Having the wrong person in a role can affect your brand. Customers today have more ways than ever to spread the word about their experience and social media users aplenty love the shock value of a terrible service story. Online reviews can directly affect sales and a badly handled complaint can create nightmare headlines. It pays to avoid bad hires.

6. Lost prospects and customers

Negative reviews sparked by bad hires can be devastating. Poor customer service and unprofessional mistakes lead to lost revenue. Existing customers may cut ties rather than risk a repeat negative experience and new client prospects will go elsewhere instead.

In extreme circumstances, reputational damage could affect your vendor relationships and where you can advertise.

How to calculate the cost of a bad hire

The formula for calculating cost per hire is:

The value of all internal recruiting costs plus the value of all external recruiting costs, divided by the total number of hires for a specific period.

Typically, internal recruiting expenses include:

  • Job advertisement fees
  • Candidate assessment costs
  • Recruitment branding
  • Hiring manager’s salaries
  • Employee benefits
  • Travel expenses incurred while recruiting new employees

External recruiting costs include the contractual costs of a recruitment agency, external recruiter or staffing firm.

Taking into account employee turnover, costs range between 100% and 300% of the replaced employee’s salary, and that more than 20% of new hires will subsequently leave the post within 12 months. The cumulative cost of hiring the wrong person can be expensive.

What to do when you’ve made a bad hire

Finding the right person for the job isn’t easy, and having the wrong employee on your team — even briefly — is expensive. Unfortunately, a lot of businesses suffer from hiring the wrong person for the job.

You need to find people who are well-suited to their jobs. You need to find them the first time. Ideally, with the right team, you’ll build a working environment that encourages quality hires to stay with you for years.

Now, let’s talk about what to do should you make a bad hiring decision.

1. Apply focused feedback or reassignment

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, financial losses might be mitigated by not having to go through the hiring process again for that post. The investments already made into hiring and training the employee is not entirely wasted.

Employees don't always underperform as a result of poor hiring decisions. Trust your instincts. You hired this person for a reason. Additionally, shop within. Sometimes the best employees are already inside your organization.

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

Poor sales, missed goals and deadlines are just a few examples of the cost of hiring the wrong person. Every missed sale, goal or deadline risks revenue loss and compounds further problems. Before losses add up to a significant problem, it’s wise to assess the situation before taking action. Your choices are to retrain, reassign, or cut your losses and a 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 makes sense.

4. Fire gracefully

If you have to fire a bad hire, it's going to be an uncomfortable conversation. The new employee knows his 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 may 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 were simply not 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 interview 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.

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