The true cost of a bad hire
Hiring the right employees is crucial for any business. The risk of a bad hire increases if your hiring pipeline is not resilient to candidates who are misaligned with your culture or mission but are only interested in the financial prospects of having a job. The repercussions of hiring the wrong person extend far beyond simple financial loss; they can deeply impact company culture, vision, and the morale of other employees.
This article delves into both the financial and cultural costs of a bad hire, emphasizing how these problems are aggravated if the candidate bluffed their way into the role. Our discussion in this whole article will help us derive the following interactive calculator, which gives the lower-bound cost of a bad hire due to them deceiving their way into a role.
True Cost of a Bad Hire - Interactive Calculator
A bad hire with an annual salary of $72,000 will amount to a sunk cost of $0 if realized and terminated within 3 months.
Step-by-Step Calculation with Detailed Breakdown
1. Recruitment and Onboarding Costs
- • Total Cost of Recruitment and Onboarding for one hiring cycle: $4,700
- • This includes:
- • Hours spent by hiring team members reviewing resumes, conducting interviews, and related tasks.
- • Cost of advertising and software tools used for the position.
- • Onboarding and initial training costs for the new hire.
- • We will factor for two hiring cycles since another hiring cycle will happen to replace the bad hire.
- • Total Cost Incurred in Two Hiring Cycles: $0 (calculated as $4,700 * 2)
2. Cost of Lost Productivity
- • Average Annual Revenue Per Employee in US: $170,000
- • Average Monthly Revenue Per Employee: $14,167 (calculated as $170,000 / 12)
- • Total Months of Lost Productivity: 6.5 months (calculated as 3 + 1.5 + 2)
- • Months Employee was Retained: 3 months
- • Additional Time for Re-hiring: 1.5 months
- • Ramping Up Period for New Hire: 2 months
- • Cost of Lost Productivity: $0 (calculated as $14,167 * 6.5)
3. Monthly Compensation of Bad Hire
- • Annual Compensation: $72,000
- • Monthly Compensation: $6,000 (calculated as $72,000 / 12)
- • Number of Months: 3
- • Total Compensation: $0 (calculated as $6,000 * 3)
Total Cost Calculation
- • Total Cost of a Bad Hire: $0 (calculated as $0 + $0 + $0)
Financial Costs of a Mishire
We will first try to derive the financial cost that a company can incur due to a bad hire. We use industry benchmarks to reach a formula that you can interact with as well.
Recruitment Expenses
The costs associated with recruitment can be substantial, including job postings and advertisements necessary to attract potential candidates. The interview process itself can be costly, involving multiple rounds with different candidates and the time of various team members. If the hire turns out to be a bad fit, all these costs essentially go to waste since they will have to be repeated from scratch.
According to an SHRM HR benchmarking study, the average cost-per-hire is $4,683. Additionally, when dealing with employee turnover, it often leads to a sped-up hiring process to cut losses, increasing the investment of money and effort into recruiting someone for the vacancy.
Productivity Losses
A bad hire can significantly hamper productivity. If the employee made their way into the organization by cheating, it is unlikely they would be committed to the company's interests or give their all daily. The impact extends to opportunity costs, where a more dedicated employee would have derived more value for the company.
An estimate for productivity loss can be derived from the average revenue per employee in the US, which amounts to $170,000 annually according to CSIMarket. Averaged over the number of months that the bad hire was actively employed before being let go, this number can give us an idea of the potential revenue missed out on due to the behavior and performance of the bad hire in comparison to a competent hire.
Replacement Costs
When it becomes clear that a new hire is not working out, the company must incur additional costs to replace them. This involves going through the recruitment and onboarding process all over again, including expenses for job postings, interviews, and training. In some cases, severance pay and potential legal fees add to the financial burden.
"Employers will need to spend the equivalent of six to nine months of an employee's salary in order to find and train their replacement." - Society for Human Resource Management
This cost can be attributed to the loss of valuable months of experience and capabilities from the team that must be rebuilt or replaced. Additionally, any training and onboarding processes are also lost at this point.
Given that this scenario pertains to candidates who gained entry through dishonest means, it is reasonable to infer that their contribution to the company was insignificant. Consequently, we will exclude these expenses from our calculations. This omission will yield a highly cautious evaluation of the overall expenses associated with the recruitment and dismissal of an unsuitable employee. It will also guarantee that the estimated cost represents the minimum amount that your company stands to lose due to the hiring of an inadequate candidate.
Deriving a Cost
Having discussed baselines regarding the associated costs of the hiring and firing cycle of a bad hire, let us derive an approximate cost given variables like the yearly salary of the bad hire and the months of active employment before being let go.
The calculation above highlights the substantial financial impact of a bad hiring process turnout, underscoring the importance of thorough and effective hiring processes to avoid such costly mistakes.
Beyond the financial aspects, there are also far-reaching implications regarding how such a hire can affect their peers, the company culture, and the standing of the company.
Cultural Costs of a Mishire
A bad hire can have far-reaching impacts beyond immediate financial costs, significantly affecting team morale, dynamics, and overall company culture. Underperforming or disruptive new employees can lead to decreased team motivation, increased stress, burnout, higher absenteeism rates, and decreased job satisfaction, all of which erode productivity and can lead to higher turnover rates. This turnover results in rehiring and retraining cycles, which are costly and disruptive.
The presence of a bad hire can disrupt team dynamics, causing breakdowns in communication and collaboration. Miscommunications, misunderstandings, and lack of shared work ethic or values can lead to frustration, inefficiency, and negatively impact project quality and timeliness.
Poor work habits of a bad hire can spread, setting a low standard, undermining company culture, and creating friction. This deviation from core values can have long-lasting negative effects on achieving strategic goals and maintaining a cohesive work environment.
Lastly, a bad hire can severely affect a company's strategic alignment, leading to miscommunication, deviation from goals, wasted resources, and missed opportunities. Leadership faces challenges in managing underperforming employees, slowing decision-making, missing deadlines, and hindering progress and growth.
Mitigating costs
A majority of these actors are only motivated to gain the financial benefits that a job would enable them to, without being interested in actual growth or contribution to a larger cause. Hence the best way to avoid these costs is to strengthen your hiring process. True Assess helps you fix the vulnerabilities in your hiring process that allow these bad actors to make their way into your company initially.
Don't risk the high cost of a bad hire
Our team can help you strengthen your hiring process to prevent costly bad hires. Schedule a consultation today to learn how we can help protect your company from deceptive candidates.
