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How Much Does A Bad Hire Really Cost?

December 31, 1969 posted by Steve Brownstein

by Rich Greenwald

Imagine this: You are about to pitch a new piece of business when you turn on your laptop and realize the slides in your presentation aren’t in the proper order, some of the information isn’t accurate and the handouts are missing. Your new assistant blew it. You are embarrassed and unprepared to pitch the client. And you probably just lost out on signing a new client.

Did your HR manager conduct a thorough background check on this new employee? Were references checked?

What will this mistake cost your company?

Myriad factors contribute to the costs associated with a bad hire. They include writing and placing a job ad; screening candidate resumes, phone calls and emails; arranging and conducting interviews; and checking references. If the candidate passes the test, additional costs can be identified. They include training, mistakes made, reduced revenues if the employee is in a sales position or one that generates company revenue, performance reviews and more. Relocation expenses and a signing bonus are other costly additions.

Studies show varying costs associated with a bad hire. They range on the low end around 20 percent and on the high end, 200 percent.

No matter which end of the spectrum, there are, in all cases, significant costs accrued when a company makes a bad hire. Some companies may see those costs in the short-term, or in the course of a year or two. The bottom line? No matter how you crunch the numbers, there is a negative financial effect.

If your HR manager is conducting interviews directly, along with input from other staff members, that’s the first area of lost productivity. If and when that candidate is hired and turns out to be a poor performer, those employees might be the ones putting their responsibilities on the backburners to train the new person, fix work errors and potentially oversee work that must be redone. Poor performance and lost productivity can generate a high amount of lost revenues.

For bad hires in a customer-facing position, revenues are lost with unhappy or dissatisfied customers and can potentially result in the loss of those clients. Imagine doing business with a company that recently hired a receptionist that is mean or careless. Are you being treated with respect? Are your messages getting through to the appropriate person? In the case of product development, bad – or unproductive – hires can slow down the process, delaying or passing a deadline to bring a product to market.

Another way a bad hire impacts strong employees is by not adapting to corporate change. Good employees understand and respect change, but a bad hire may resist it, thereby distracting those employees who contribute positively.

Small-business leaders are often heavily involved in the daily goings on of their companies, so a poorly-performing employee often impacts that leader’s confidence – not to mention stress levels – which typically travels down the management line. Time spent by all management trying to remedy the situation also decreases productivity.

Utilities, manufacturers or industrial companies that require physical activity of their employees are also susceptible to lost revenues as a result of a bad hire. Careless employees have higher injury rates, resulting in lost productivity and disability payment. These employees also likely cause more avoidable accidents and may not only injure themselves but others, too.

How can you avoid hiring a bad employee?

Develop a checklist that includes all aspects of what your company is seeking in a new hire. Such items can include personality traits – How will this person adapt to our corporate culture? – and examples of relevant career successes. Be sure to check all references.

Develop a complete list of competencies required by both the job and the company and assess whether the personalities in the new hire’s department will complement those of the new hire.

Ask questions about previous employment and reasons for seeking work with your company.

Last, but not least, interview the candidates properly and thoroughly and ask relevant questions that will provide insight as to whether the hire will be a sound one.