The True Cost of a Bad Hire (And How to Avoid it)

Pragnesh Anekal -

Did you know that Twitter started off as a podcasting platform? That Slack originated out of a gaming company? And, of course, everyone is familiar with the fact that Youtube was originally a dating platform and that all Amazon used to do was be an online retailer for physical books.

This goes to say that even when businesses have reinvented their whole idea, they have managed to succeed because they had the right people. Finding the right individuals matter, no matter what business you are building.

However, companies have had a hard time finding employees who are a good fit. They have suffered major losses due to bad hiring decisions. How much do you believe it is?

$100 million, according to Tony Hseigh, CEO of Zappos. And he is not the only one who feels that way.

75% of employers believe they hired the wrong person for a position and ended up losing an average of $15,000 for every hire.


Serial entrepreneur, Michael Girdley whose companies have combined revenues of $100 million+ believes that an unstructured hiring process has cost him millions of $ in bad hires.

As you can see, this is a common mistake made by all businesses, and for small businesses in particular, these costs can be a major threat.

True Cost of a Bad Hire

According to research, lousy hires and disengaged staff cost US businesses anywhere from $450 billion to $550 billion annually. It costs companies more than $4000 to make a new hire, just a hire, not a "good" or "bad" hire. If they turn out to be bad hires, the costs increase exponentially. When employers were asked what exactly led them to believe they had made a poor hiring decision, this is what they came up with:

  • The employee didn’t produce the proper quality of work: 54%
  • The employee had a negative attitude: 53%
  • The employee didn’t work well with other employees: 50%
  • The employee’s skills did not match what they claimed to be able to do when hired: 45%
  • The employee had immediate attendance problems: 46%

(Source: Careerbuilder)

Calculating the cost of a bad hire

Let's say your team contains simply one ineffective member. This employee's replacement can cost your company upto $240,000. Whether you run a little business or a major enterprise, this is not a small sum.

When you take into account the entire process of replacing the applicant with another effective employee plus the costs that have already been incurred owing to the incumbent employee's subpar performance, the true cost of a bad hire can be extremely high.

According to Brandon Hall Group, a human capital research firm, these are the categories that influence the cost of replacing an inefficient employee:

  • Recruitment advertising fees and staff time
  • Relocation and training fees for a replacement hire
  • Negative impact on team performance
  • Disruption to incomplete projects
  • Lost customers
  • Outplacement services
  • Weakened employer brand
  • Litigation fees

After accounting for all the factors above, it is estimated that replacing just one candidate will cost $29,786. The higher up the ladder the position is, the more expensive it will be for your company to replace the employee.

The Art of Interviewing

The entire hiring process is an art and should be carried out carefully and effectively.

Use objectivity to eliminate and subjectivity to select

Your gut serves you well most of the time. However, you cannot rely on your gut when it comes to evaluating every single candidate in the application.

Use objective recruiting procedures during the first few rounds of hiring to ensure a fair and accurate manner of eliminating applicants who are unqualified for the position.

After excluding the incorrect individuals, perform interviews to get to know your candidates better and, in the process, assess their job-related talents.

Finally, trust your gut when you have to pick between two individuals who have the same qualifications, values, and skill sets. Instincts are a poor way to evaluate candidates holistically, but they are an excellent approach to selecting the candidate when everything else is in order.

Branding

It's like Harvey Specter says in Suits, "Get it through your head. First impressions last." In this day and age, when everyone is bombarded with content on every possible platform, you only have a few seconds (to be exact, 27 seconds) to capture the attention of whoever is viewing your content, whether it's customers or potential employees. Make sure to make a great first impression.

Only by attracting the right type of crowd will your job applicants meet your expectations.

Use pre-employment assessments

Pre-employment tests solve more than half of your hiring problems. Whether it's the issue of an employee's overblown resume or testing for on-the-job skills, a pre-employment assessment does the right job for you to evaluate candidates on a holistic level.

This adds objectivity to your hiring process as well. With pre-employment tests, shortlisting won't be done based on the recruiting manager's personal preferences or unconscious biases. This leads to a more objective choice based only on the candidate's qualifications and competencies.

Hire slow and fire fast

No matter how desperate you are to fill a position at your company, do not rush the process of hiring someone. Take your time to evaluate the candidate in every aspect to be confident that the person being hired is the right candidate for the job.

However, mistakes do happen. You might hire the incorrect individual on occasion. If you feel your expectations are not being met after hiring, terminate the person immediately. This benefits your business in the long term and the individual being let go because sticking with a company where they don't belong does them no good.

On a Final Note

Hiring is a difficult task. Bad hires are part and parcel of any business. Remember that the goal is to minimise the possibility of onboarding an inefficient member as much as possible.

When you understand the costs of making bad hires, you begin to take a much more careful process to onboard new employees into your organization. Take your time, use pre-employment assessments, ask the right questions in interviews, and use referrals to ensure that your organization hires only the best.