The Real Cost of a Bad Hire
Hiring great talent is expensive. But hiring the wrong talent is even more so! There are all sorts of costs associated with a bad hire – both financial and non-financial.
In this article, we delve into the true costs of a bad hire, and help you avoid them in the future. Let’s get started!
The Financial Cost
Hiring the wrong person can hit a company's bottom line more than we might realize. According to Career Builder, 20% of employees quit within the first 45 days, and in the case of a tech employee, it costs the company up to 50-60% of their annual salary. On a
HR teams often use two simple calculations to see the financial picture: Cost Per Hire (CPH) and turnover rate. CPH adds up external costs like advertising and internal costs like HR employee’s salaries involved with hiring. Divide that total by the number of hires, and you get a per-hire cost.
The turnover rate formula looks at how many people leave multiplied by the total cost of an employee. This includes more than just the salary – it's the benefits, onboarding, and development costs.
Imagine a company with 100 employees and a 15% turnover rate, where the total cost per employee is $30,000. The financial impact of turnover would be 15 employees leaving * $30,000 each, resulting in a $450,000 loss.
In simpler terms, bad hires don't just cost you the recruitment and salary; they dig into benefits, training, and more. So, it pays – literally – to make sure you're hiring the right person from the start.
And even though that gives a rough idea, that doesn’t cover everything… Just think about the potential extra revenue that would have been generated if you had hired the right person on the first try. When we consider the additional revenue, product, or intellectual property to a company that the right hire might have added, it is impossible to accurate calculate the potential impact of a great hire.
The Non-Financial Cost
Beyond the financial costs, there are also a lot of other negative effects of a bad hire.
Hiring the wrong person can damage your brand, impact morale and lead to even higher turnover. Negative perceptions can spread online, affecting your company's image on platforms like Glassdoor. This reputation damage makes attracting top talent more difficult.
Bad hires can also diminish team productivity. A Brandon Hall Group study showed that 72% of businesses connect team dynamics to improved productivity. When one employee underperforms, it spreads disengagement to the whole team.
A Career Builder study indicates that 60% of employers observe poor cooperation from bad hires. Their failure to align with the team's work ethic burdens other employees and fosters resentment.
How to Avoid Bad Hires
It should be clear by now: avoiding bad hires is crucial for long-term, sustainable business success. But how do you avoid them? Here are four strategies that are proven to help.
Use Detailed Job Descriptions
Align job descriptions with the role's requirements and make it as specific as you can. Don’t use generic or copied descriptions.
Only Target the Right Audience
Market the job to the right audience – and no one else. You might think it’s smart to advertise your job opening to a broad audience to increase the chances of finding the right candidate, but you increase your chances of finding the wrong candidate even more.
Customize the Interview Process
Conduct an initial phone interview, for which you prepare specific, position-related questions. Don’t just consider whether or not they are a fit for the role, but also think about whether they are a fit for the company. Culture fit is arguably even more important.
No Panic Hiring
Hiring the right person takes time. It’s tempting to rush when you think you might have the right candidate, but this is often where it goes wrong. Take your time.
Key Takeaways
Let’s recap:
Bad hires can cost companies a significant amount, with tech companies spending an average of 50-60% to replace an employee who quits.
HR teams use Cost Per Hire and turnover rate to assess these expenses, factoring in recruitment, salaries, benefits, and more.
A 15% turnover rate in a company of 100 employees at $30,000 per employee results in a $450,000 loss due to turnover.
Bad hires also affect brand image, team morale, and productivity, leading to higher turnover and damaging cooperation within teams.
Detailed job descriptions, targeted marketing, specific interviews, and realistic timelines help avoid bad hires.
With this information in mind, you not only know how important it is to make a good hire, you also know how to avoid making a bad one. Sleep well knowing your next hire will be a good one!
