What Is The Cost Of A Bad Hire?
What is the real cost of a bad hire? Why is it important to choose who you hire carefully, and how much money and revenue can you lose if you hire the wrong person?
The average cost of a bad hire is up to 30% of the employee’s first-year earnings according to the U.S. Department of Labor. However, one report from the CEO of Link humans put the average cost as high as $240,000 in expenses. The costs broken down relate to hiring, retention, and pay.
Poor hires can result in lost productivity and expenses in hiring, recruiting, and training replacements.
In this article, we will explore the true cost of a bad hire, on average, and the extra expenses you might be faced with if you hire the wrong person during the interview process.
- What Is The Cost Of A Bad Hire?
- This Is How Much a Bad Hire Will Cost You
- How Hiring Bad Employee Costs You Money
- What is the Average Cost per hire?
- 10 Warning signs of a Bad hire
- How to Deal With a Bad Hire
- 7 Ways to Spot Candidate Red Flags
This Is How Much a Bad Hire Will Cost You
The United States Department of Labor puts the cost of a bad hire at up to 30% of the employee’s wages for the first year. In the event that you take an employee with a yearly pay of $80,000, the expense to the employer would be as high as $24,000.
This might not seem like a lot to a business, but if you are a small business and have a small budget, this amounts to a lot of wasted money that can hurt your bottom line.
However, it is not just the money that you will lose. In a study, 34% of CFOs said that not only do bad hires cost them productivity, but managers also have to spend 17% of their time supervising poorly-performing employees.
For a standard workweek, that translates to almost a full wasted day that could have been spent on actual work!
However, some reports put the average cost of a bad hire much higher. Recruiter Jörgen Sundberg, CEO of Link Humans, puts the cost of hiring and onboarding new employees at $240,000.
This means that if you spend money on an employee who turns out to be a bad hire, you can waste up to $240,000 in total costs. That’s a significant amount of money!
According to CareerBuilder, almost three-quarters of companies who made a bad hire reported an average of $14,900 in wasted money. With 74% of employers stating they hired the wrong person for the job.
Research by Gallup estimates that actively disengaged employees in the United States cost businesses anywhere from $450 billion to $550 billion in lost productivity each year.
In the next section, we will drill deeper into how a bad hire can end up costing your business a lot of money.
How Hiring Bad Employee Costs You Money
A bad hiring decision can cost you money in ways you did not even think of. Let’s go through the top ways you can lose money by hiring the wrong employee.
This is the biggest problem with hiring the wrong person. Bad hires may be lazy and unproductive, which can cause you to face slowdowns in reaching your goals.
You may have projects that have deadlines, but if all of your employees are not on board and working together, you may miss those deadlines and have to face unsatisfied clients.
If an employee is not doing a good job and being as productive as possible, your customers may be unsatisfied. Even if they get their work on time, if it is not of good quality, they may end up leaving you. One bad hire can lead to quite a few lost clients.
Damaged Reputation with clients
It is not just existing clients who you might lose but new clients as well. This is because disgruntled former clients may end up writing bad reviews about you, which can affect your reputation and your ability to attract new clients.
Damaged Employer Reputation
Not only that, but a bad employee who is disgruntled because you fired them for not being productive may end up writing a bad review on a job hiring site such as Glassdoor reducing your company ratings, which could hinder your efforts to replace them not to mention damaging your employer brand.
This is something that most managers don’t think about.
One bad apple ruins the bunch, as they say. When all of your team members work together and focus on the same missions, goals, and values, your company will be able to be productive and get things done.
On the other hand, if there is one unproductive and undedicated employee, they can end up bringing down the entire work environment while having a negative impact on your bottom line.
Lost Time Supervising a Bad Hire
You may not fire that bad hire right away. Many managers first try to get their employees to be more productive and get on board with the team. However, this can result in lost time and employee turnover.
The time you spend supervising bad employees could have been used for more important things. Time is money.
Whether it is the lost money you spend on recruiting that wrong hire or the extra money you will now have to spend to find a replacement quickly, hiring costs can add up. The effort and time a hiring manager spends interviewing replacements can result in lost revenue.
Some of the costs in the recruiting process include:
- Writing a great job posting
- Paying job search websites to post a job ad.
- Screening resumes for the right work experience
- Reaching out to passive and active candidates
- Following up with qualified applicants that applied
- Scheduling and Conducting interviews
- Performing background checks and waiting for the results
- Negotiating annual salary and sending offers to candidates
- Waiting on candidates to decline or accept an offer.
The same goes for training costs. When you hire a replacement, you may need them to quickly get to work on the projects that the bad hire was working on. You may need to invest a lot of money into training them and providing them with the knowledge and tools they need to be good employees.
Even if they are dedicated, they might need help with the learning curve to develop the necessary skills shortening the onboarding process.
This is not as common, but if you have to fire an employee because they are bringing down the team and disrupting your progress, you may face litigation. This means that you will end up with high costs on legal fees. By avoiding hiring bad candidates in the first place, you can prevent this from happening.
What is the Average Cost per hire?
The average cost-per-hire according to SHRM is $4,129 and the amount of time it takes to fill a position is 42 days. This data is from the SHRM Human Capital Benchmarking Survey. The data also suggests the average annual turnover rate is 19%.
The Bureau of Labor Statistics reports that 37.7% of compensation was attributed to the cost of benefits and 62.3 % of total employee compensation came from salaries and wages.
10 Warning signs of a Bad hire
- Employee quality of work is not up to standards set during the training period.
- The employee keeps making the same mistakes over and over
- They are frequently late to work or miss days completely
- The employee doesn’t take ownership of mistakes.
- Skills are missing that the employee claimed to have in their resume
- The employee is very negative and critical of the company processes and systems.
- They don’t complete projects on time and consistently underperform.
- Customers complain about the employees poor attitude and give bad reviews.
- They constantly complain about work to their coworkers
- There is a growing lack of respect for management
How to Deal With a Bad Hire
The best way to deal with a bad hire is by being more selective in the hiring decision process from the get-go. By being careful with who you employ, you can avoid poor hires and maintain company culture.
Setting clear expectations during the hiring process can help bad apples get weeded out on their own. In addition, make sure to go with your gut and not hire someone who you are getting a bad feeling about.
If you do see that an employee is unproductive with a bad work ethic, act on it right away. First, find out why their work quality is not up to company standards and make sure it is not because of a pressing family issue, such as a sick parent.
It could perhaps be that they need more training that was missed in the recruitment process.
If you realize that the employee just doesn’t care about your business’s success and is lazy, you need to act quickly and terminate the employee sooner rather than later. You can also reassign them, depending on the situation.
It’s important to stay on top of your employees and make sure they are productive. Many hiring managers don’t realize they have a bad employee until it is too late and have lost a lot of money as well as reducing employee morale.
By keeping an eye on things and staying on top of what is going on at your company, you can spot a bad hire fairly quickly.
7 Ways to Spot Candidate Red Flags
- Makes excuses early on in the hiring process
- Unusually long delays in communication when setting up interviews
- Just focused on questions regarding benefits and compensation
- The candidate shows up late to the interview
- Canceled interview at the last minute and asked to reschedule
- The candidate has not researched your company and knows little about you
- The candidate knows very little about the job they are applying for
Any business can hire a bad apple. It’s not easy finding qualified candidates that are high performers so there’s no reason to beat yourself up about it.
However, it is important to realize the true costs of hiring the wrong person, which can lead to thousands of dollars or even hundreds of thousands of dollars in losses.
By being very selective with who you hire and making sure to quickly spot bad candidates.