What's the Cost of a Bad Hiring Decision?

If you ever wonder why companies take so long in deciding which candidate to hire for a particular position, consider this: the cost of selecting the wrong person can run into the hundreds of thousands or even millions of dollars, not to mention the potential negative impact a company’s morale and productivity.

Ryan Holmes, CEO of HootSuite, suggests that "One subpar employee can throw an entire department into disarray. Team members end up investing their own time into training someone who has no future with the company."

Lump on a recent Harvard Business Review article which points out that as much as 80% of employee turnover is due to bad hiring decisions, you can readily understand why some companies have a grueling or prolonged interviewing process in such a tight labor market. And yes... the labor market is tight, but that doesn't mean that companies are going to be foolish in their hirings.

The numbers don't lie about how big and widespread this problem actually is.

• The average cost of a bad hiring decision can equal 30% of the individual’s first-year potential earnings. US Department of Labor and Statistics
• The successful aren’t immune, and they’ve had to learn from their mistakes. Zappos CEO, Tony Hsieh once estimated that his own bad hires have cost the company well over $100 million. 
• 66% of employers said they experienced negative effects of bad hires in 2016. Of these employers, 37% said the bad hire negatively affected employee morale. Another 18% said the bad hire negatively impacted client relationships. And 10% said the bad hire caused a decrease in sales. A study from the National Business Research Institute.
• 43% of respondents from the same NBRI study cited the need to fill the positions quickly as the main reason that bad hires are made. 
• It costs $7,000 to replace a salaried employee, $10,000 to replace a mid-level employee, and $40,000 to replace a senior executive. From HR.com.
• As much as 80% of employee turnover is due to bad hiring decisions. From Harvard Business Review.
• 36% of 1,400 executives surveyed claimed that the leading factor of a failed hire, aside from performance problems, is a poor skills match. The second leading factor at 30% was unclear performance objectives. Study done by Robert Half.
• 75% of the demand to hire new employees is simply to replace workers who have left the company. 

What's happening here?

There is a wide disparity among what a wrong hire can cost a company because there are so many variables. For example, the Labor Department estimates it can cost on average one-third of a new hire’s annual salary to replace him or her and that those costs increase the higher up in the organization the turnover occurs.

Others say it could be even higher than that. According to a study by the Society for Human Resources Management (SHRM), it could cost up to five times a bad hire’s annual salary. SHRM also found that the higher the person’s position and the longer they remain in that position, the more it will cost to replace him or her.

And what about keeping that "bad hire" onboard? Turnover can be very costly, from the money wasted on hiring the wrong candidate to the time and actual cost-per-hire expenses. While these costs are significant, the real loss to your organization is the hidden cost of retaining the bad hire. 

If you make a mistake in hiring and you recognize and rectify the mistake within six months, the cost of replacing that employee is still going to cost you two and one-half times the person’s salary. That means a poor hiring decision for a candidate earning $100,000 per year could cost, on average, $250,000, and that expense comes right off the bottom line.

Why Are The Costs Soooooooo High?

Expenses associated with hiring include interview expenses such as travel, hotel and meals, training and orientation, employment testing, termination costs such as Cobra, unemployment and potential litigation expenses should the candidate decide to sue you for wrongful dismissal, plus relocation costs and outplacement or career transition costs. But mostly it’s because you need to repeat the entire hiring process to replace the wrong hire, which includes time and expenses.

There are also hard-to-quantify costs that could be lethal to your business such as lower employee morale, customer dissatisfaction, lost customers, lost sales, reduced quality of products and low production.

Plus, whenever someone is terminated, there’s a disruption among the other employees who begin to question what caused the termination and does it affect how their performance is evaluated, not to mention the increased workload on all the other employees who have to pick up the work of the employee who was let go.

As a member of Relus' recruiting team, Brian Fink focuses on driving talent towards opportunity. Eager to help stretch the professional capabilities of everyone he works with, he's helping startups grow and successfully scale their IT, Recruiting, Big Data, Product, and Executive Leadership teams. An active keynote speaker and commentator, Fink thrives on discovery and building a better-recruiting mousetrap. Follow him on Twitter.