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Jordan Shlosberg
Introduction to the Cost of a Bad Hire
Hiring the right talent is more critical than ever. However, despite best efforts, 85% of decision-makers admit they’ve made a bad hire.
So what’s the cost of a bad hire?
It goes far beyond the initial salary and extends to lost productivity, decreased morale, and damage to your company’s reputation. While there is no one-size-fits-all figure to quantify the true cost of bad hires, there is no denying their impact.
There is a glaring lack of agreement and comprehensive data on the true cost of a bad hire. This is partly due to the various factors that contribute to this complex issue.
In this blog post, we will pull together the most trustworthy statistics and dissect the cost of a bad hire, step by step.
Note: We will be focussing on a MID-LEVEL MANAGER with a salary of $100,000
The Financial Cost of a Bad Hire
The SHRM conducts annual benchmarking on hiring costs. Most recently, it pegs a typical hire at around $4,700 and an executive hire at around $28,000.
A thorough study by Oxford Economics suggests that the average hiring cost is $7,000 per hire and $9,000 for an IT specialist. This includes advertising costs, interview costs (from other members of the company) and a portion of incremental costs from third-party staffing companies.
The filling cost of a bad hire is $9,000
How much does a bad hire cost to employ?
According to the ICMA, 46% of new hires fail within 18 months. A survey from Robert Half suggests that it took around three months to realize a bad hiring mistake had been made and then exit the underperformer.
This is obviously the worst-case example because, for many companies, the training alone would take up to four weeks.
Early signals of a bad hire can be mistakenly thought of as unfamiliarity and many companies would first resort to extending the probation period to see if the situation improves, and following that a performance improvement plan. Adding a 30-day performance improvement plan takes us five months.
In case you find yourself in this situation, read our handy guide on how to exit people as gracefully as possible.
The employment cost of a bad hire is $41,600
The cost of a bad hire on direct reports
A Gallup study (re-confirmed by another study from DDI) showed that 50% of resignations occurred because of that employee’s manager.
The monthly US quit rate stands at 2.6% which means 31% of employees resign each month.
25m Americans resign each year because of their managers.
If you assume an even distribution, a bad manager causes four resignations per year (or half of their team).
In the five-month period discussed above, 1.5 additional resignations (and all those costs) are attributable to the bad hire!
The replacement cost of a bad hire is $14,000.
This doesn’t include the negative impact of not having those people in your company
The cost of a bad hire on the manager
If you’ve ever had to deal with a bad hire, you’ll know that it takes up an inordinately large amount of your time.
You pay them special attention either coaching them to be better or fretting about why they aren’t running to the level you expect (not to mention the anguish they’re causing through your team).
If that bad hire takes up 10% of your time in those five months, that’s an additional cost of $6,250
How much do you pay in severance for a bad hire?
Once you exit the individual, you are on the hook for additional costs. Sometimes it could be as little as two weeks' notice and sometimes as much as three months.
Removing bad hires can occasionally lead to lawsuits which are usually worth settling but to be conservative, let’s assume four weeks which means the severance cost of a bad hire is $10,000
What's the cost of having a role unfilled?
Data from Robert Half suggests that it takes 11 weeks to fill a position from start to finish. That’s before the new hire’s notice period is taken into account.
Sometimes the remaining employees can pull together and make up for the absence but this does lead to undue stress.
You may need to bring in contract work to provide cover. As an example, if you have too few finance people in your team, you may see your collections slow down. This would create a need to hire a cash collection specialist on contract. And that costs 1.5x a full-time salary.
Bringing in temporary cover for six weeks (vs the eight months it takes to rectify the mistake), would lead to another $17,000 in expenses
The cost of an empty seat is much higher for revenue-generating positions, such as salespeople, product people and service delivery people.
If the bad hire in question was a SaaS salesperson with a $500k quota, the sales cost of a bad hire is $200k in revenues.
Unhappy Clients: How a Bad Hire Can Damage Your Reputation with Clients
A bad hire can have far-reaching implications, including damaging your reputation with clients. When an employee fails to meet expectations, it directly impacts the quality of service or products offered, leading to client dissatisfaction.
This doesn't just translate into financial losses but also risks damaging the trust and relationship built with clients over time. The aftereffects can include negative word-of-mouth, lost business opportunities, and a tarnished brand image. Therefore, ensuring a thorough recruitment process that identifies the right talent aligned with the company's values and service standards is essential for maintaining client relationships and the company's reputation.
The cost of a bad hire on your client relationships is difficult to quantify but considerable.
Black swan events
A black swan event is one that is exceedingly rare but when it happens, it causes a major impact.
Bad hires will bring with them an increased likelihood of black swan events. They could create a huge compliance headache, make a mistake that costs money, or burn a client relationship.
Although we haven’t accounted for these hypotheticals, they exist.
The cost of a bad hire
The cost of a bad hire works out at 98% of the person’s annual salary.
That excludes the loss of benefit from hiring the right person in the first place.
For leadership, sales, product and service delivery, the loss of benefit would be much greater.
How do you avoid paying the cost of a bad hire?
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Ensure all stakeholders are aligned on the kind of employee that they’re looking for. Ask the question “What do you expect the successful person would have achieved after 12 months”.
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Ensure your hiring process is the best it can be. This means being structured and rigorous. It also means ensuring that all your staff are interview trained. You can steal our approach if you want
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Focus on the key values (humble, hungry and smart) and do not look the other way because you enjoyed the interview.
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Work with trusted recruitment partners who are aligned with your outcomes and not their own.
At Berg Search, your success is our passion.
If you want to have a conversation, feel free to reach out.
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