The Real Cost of a Bad Hire

You’ve done the math and you know the cost of a bad hire. Even if you haven’t figured it out yet, it’s more than you think. A lot more.

The size of your business impacts the numbers; small businesses actually spend more on training and their overall cost of a bad hire is more, not less, than Big Business.

Small businesses lose somewhere between $25,000-$50,000 when they choose – and lose – a bad hire. Some of the immeasurable costs can include:

  • Management burnout – You, your supervisors/team leads may experience a let-down after a bad-hire experience. This negativity can impact overall business management and trickle down to employees.
  • Morale – Especially in small business, a bad hire can negatively affect the entire workplace. Eventually, the resentment your employees feel can be aimed at you; the one who hired the employee.
  • Productivity – This may be the most immeasurable but perhaps the biggest cost of a bad hire. Just one bad hire added to a high-performing group can lower productivity by 30-40%. The entire time a new hire isn’t contributing or making money, long-term employees are picking up the slack. If this goes on too long, one employee may “cop an attitude,” and that attitude can quickly become contagious. Instead of picking up the slack, resentful employees may drop the ball.
  • Recruiting, training, onboarding – From the advertisements through interviews, background checks, drug screens, on-the-job orientation, paperwork, insurance… When a new hire doesn’t work out, all that time and money are wasted. Plus you have to repeat the process to find a replacement.
  • Turnover – This is a worst-case scenario, but the cost of a bad hire includes the risk of losing top performers. They may feel your standards are low and they’d be better off at another company.

Training

If you’re lucky, you’ll only lose a week’s worth of time in new hire training. What’s your time worth? What’s your manager’s or team lead’s time worth? If your new hire’s trainer earns $36/hour, that’s over $1,400. Add the new hire’s salary and that’s just a fraction of the cost of a bad hire – or a good one, for that matter.

Your industry is another factor. Training an administrative assistant is nothing like safety training for an in the field technician. Specialized training is more expensive. And some employees learn faster; however, it doesn’t make them better odds for long-term employment.

If you want to estimate the cost of training new hires for your business, you can factor:

  • Training time and materials
  • Productivity loss – new hire’s plus trainer’s salary/hour
  • Outside training – Classroom, online, etc.

Because 43.98% of new-hire turnover occurs within the first six months, you want to be sure you’re doing the best training/onboarding possible. When that new hire leaves, you’ll spend up to an additional 21.4% finding a replacement. You can see how the cost of a bad hire adds up.

Clues Your New Hire is a Bad Hire

Setting proper expectations and regular communication with your new hire can help you determine if you made a mistake. Watch for these on-the-job red flags and don’t wait too long to respond:

  • Absenteeism – The cost of a bad hire includes last-minute illnesses, family problems, car problems… You’ve “heard it all” and with your bad hire, you’ll hear it all again.
  • Brand credibility – Along with the drop in customer satisfaction/employee morale, the cost of a bad hire can include compromising your image. Every person in your company is an ambassador. They represent your business and its standards. A bad hire can have good employees grumbling outside the workplace. Without even knowing it, they are giving your competitors an edge.
  • Customer satisfaction/loss – If your company is service-oriented rather than retail, you may not know you’ve taken a hit until next year. Your best hope is that customers will complain; you can then do damage control. Otherwise, your bad hire may cost you good clients.
  • Management time – Time spent focusing on the bad hire takes its toll in other areas. That can be a direct cost and opportunities lost while you’re overseeing the bad hire.
  • Mistakes – Minor mistakes happen, but the cost of a bad hire can include too many minor mistakes and some very serious errors. Respond quickly. Don’t let valuable employees cover the cost of a bad hire.
  • Revenue drop – If your top performers generate X number of dollars per week/month/year, your bad hire won’t come close.

Why Bad Hires Keep Happening

The on-paper costs of hiring a bad fit for your company are bad enough. As we examine the true cost of a bad hire, the question is: Why does it keep happening?

One reason is that companies are in a hurry to fill the gap left by another employee’s exit. Your team is overextended and overworked; they’re starting to stress about hours. “Too often, hiring managers are so anxious to 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.

Don’t blame the misfit you hired. Blame the hiring manager. If that person is you, it’s time to check your interviewing/hiring skills. “There is an assumption that because someone is a manager, they know how to interview and hire the right person for the job,” said one Las Vegas human resources advisor. Perhaps you need to recognize your managerial strengths lie elsewhere.

Appearances Are Deceiving

During the interview process, potential employees who can deliver the best work consistently are fully competent and highly motivated. Here are the runners-up, and you may recognize one or more in your bad-hire recruitment history:

  • Fully competent; not highly motivated – Has the skills and experience; seems like a safe bet. Turns out to be short-term.
  • Not fully competent; not highly motivated – Typical bad hire; may have made a good presentation. You were in a hurry… Turns out to be short-term.
  • Not competent; highly motivated – This is the worst possible hire. This person can actually do some damage before you realize a mistake. During the interview, the presentation was excellent and enthusiastic. “I’m a quick learner,” was emphasized.

Put a Recruitment Marketing Plan in Place

There is a lot that goes into calculating the cost of a bad hire! The fact that it’s a surprisingly large expense doesn’t make it any less real. You need to put a system in place that will help you screen bad applicants before you bring them into your business. The expense of recruitment marketing may cost you less in the long run.