To calculate the total cost of a bad hire you need to consider a range of factors. To begin with there is the obvious financial impact an underperforming new hire will have. You must also consider how a bad hire can negatively impact team morale and ultimately drive down productivity. Furthermore, the very worst hires can spread bad habits around the company causing widespread productivity issues.
To get a handle on the total cost of a bad hire, this post goes into detail on the different ways a bad hire can negatively impact your company.
1. Financial Cost
Estimates about the total cost of a bad hire vary. They all have one thing in common though – they are absolutely huge. Research based on a second-level manager who earns $62k a year who gets terminated after 2.5 years estimates that the total cost of this bad hire runs as high as $840,000. The fully loaded costs include hiring costs, total compensation, employee maintenance costs, work disruption costs, severance, and business mistakes and missed opportunities caused by the manager’s low performance level.
Zappos CEO Tony Hsieh has publicly stated that bad hires have cost the company “well over 100 million”. Onboarding is another huge cost you must factor in. Leading recruiter Jörgen Sundberg estimates that the total cost of employee onboarding is actually $240,000. Another calculation to consider here is one by Harvard Business Review who estimate that over 80% of employee turnover comes as a result of bad hiring decisions.
While these estimates are huge, they are not necessarily that surprising. Everybody in business knows that the cost of a bad hire is not cheap. However, awareness of the high costs of a bad hire has not necessarily made companies any better at recruiting the right individuals. Research shows that 46% of new hires fail within the first 18 months while the failure rate for senior managers hired from outside the company is close to 40%. One reason behind this failure – as pointed out by Psychometrics.com – might well be that as humans our brains are naturally wired to make mistakes as we evaluate people. A rush to judgement is a common mistake when it comes to bad hires. One way companies can move on from these mistakes is to start leveraging all the data available on potential employees that is available today. By making data-driven decisions instead of relying on instinct, companies can bring down their rate of bad hires.
2. Team Morale and Productivity Cost
While financial costs like onboarding, training, salary etc. can be quantified relatively easily, there are also invisible costs to a bad hire like lowering team morale and bad habits spreading around the company. Morale is one of those intangibles that can have a huge impact on productivity. If employees like working at your company and with their fellow team members, their productivity is going to be much higher than if they really didn’t like coming to work. Hiring managers is particularly important because they set the tone for their team in terms of expectations and workload. If they set the bar too high they risk burning out their team, too low and productivity will suffer. The manager’s ability to communicate their message is also vital. If they are too negative or abrupt, they will quickly lose buy in from their team.
Even when an underperforming hire is terminated, it might still take a period of time for your company to recover. Again, if the bad hire was in a position of authority, then a culture of underperformance might have developed that will live on after their termination. Bad training or habits might have been instilled into some of your team who will need to readjust their performance levels to any replacement manager’s expectations.
In summation, the total costs of a bad hire – both visible and invisible – can be absolutely devastating to your company. Take care when screening job applicants and using all available data sources to help your decision-making can minimize the chances of bringing the wrong people into your company.