Nothing's more disappointing than realizing the person you thought would be your next superstar isn't even a one-hit-wonder.
Deadlines come and go, customers start asking questions, and your top performers are forced to step in and pick up the slack, coming one step closer to burnout.
Bad hires are uncomfortable for everyone. But the fact of the matter is — they happen.
The good news is, making the wrong hires for your team doesn't need to be business as usual. With the right recruitment and hiring processes, you can modernize your candidate selection strategies and start making better hires in less time.
4 formulas to calculate the cost of a bad hire:
- Time spent on hiring activities
- Revenue per employee
- Recruitment marketing costs
- Employee turnover rates
What is the highest cost attributed to bad hires?
If you've spent any amount of time googling this topic, you've likely been hit with a range of anxiety-inducing cost of bad hire estimates — including the following:
- Bad hires can cost up to $240,000 in expenses related to hiring, compensation and retention. — Jörgen Sundberg, Link Humans
- A bad hire can cost you up to 30% of the employee's first-year earnings. — US Department of Labor
- The average cost per hire is nearly $4,700. — Society for Human Resource Management (SHRM)
- It usually takes six months or more for a business to break even on a new hire. – Harvard Business School
These numbers are nothing if not alarming and they don’t even take into account the “invisible” costs tracked back to a bad hire.
The real consequences of a bad hire
From missed revenue opportunities to poor client interactions, hiring the wrong person not only costs money — it could also cost you time, energy and clout.
A bad hire can have a negative impact on all of the following key business areas:
- Customer satisfaction
- Employee morale and productivity
- Brand reputation
- Legal liabilities
- Training costs
- And more
This is one case where the classic analogy holds true — when it comes to managing a high-performance culture, one bad apple really can spoil the bunch.
If a member of the team is consistently underperforming, this often forces your best and most experienced team members to add even more to their plates, stealing crucial time and energy away from your most impactful workflows.
Even with a healthy budget for employee training and development, it’s often your top-performers who step in and take on additional responsibilities while you scurry to identify and coach your low-performers. But with employee burnout on the rise, this ‘hole-in-bucket’ approach simply isn’t a sustainable strategy.
According to our recent Hiring Challenges Survey, over 40% of employer respondents have difficulty managing poor performers, and nearly 39% struggle to identify and address performance issues.
While there are plenty of ways to improve performance management within your existing teams, the best cure for a bad hire is always prevention.
How do you calculate the cost of a bad hire?
A poor hiring decision has lasting consequences. We've compiled a list of proven formulas to help you find out exactly how much money your business could be losing with every hiring misfire.
But be warned, calculating the real cost of a bad hire can be tricky.
Unlike cart conversions or monthly recurring revenue, it's tough to put a hard number on human behavior. Despite the widely-cited statistics, the real cost of a bad hire will almost always vary based on your unique business.
Here are a few simple formulas to help you get to the bottom of it.
Formula 1. Time spent on hiring activities
You can't afford to spend days or weeks of your time sourcing, interviewing, and onboarding new team members, only to fire them one month later.
To figure out exactly how much money you're losing due to the amount of time spent on a bad hire, start by identifying all the members of your hiring team.
Let's say you have: 1 departmental head, 2 members of your HR staff, and 1 CEO involved in every hire.
Next, determine how many hours per week each person spends on hiring-related tasks. For example, a member of your HR team might spend 30 hours of their week on recruitment and hiring activities.
Now all you have to do is multiply that number by that individual’s hourly rate to arrive at the real time cost.
30 hours per week x $20 per hour = $600 per week
Once you know exactly how much time is lost on a bad hire, you can begin working your way towards a more efficient recruitment and hiring process.
Formula 2. Revenue per employee
This next metric is a big one.
The right hire can save you a lot of money in onboarding and retention costs. Of course, high performers are also great for your bottom line. But how can you break that down into hard numbers?
First, check your company's year-end financial report (or SEC report if you're publicly traded) for the revenue per employee. Then, multiply that number by your average profit contribution to get an estimate of the profit margin per hire.
Let's say your revenue per employee is $200,000. With an average profit contribution of 40%, each employee brings in approximately $80,000 per year.
$200,000 revenue per employee x .40 average profit contribution = $80,000 in profit
You could even choose to take this a step further by comparing the profit contribution of a low-performer to that of a high-performer.
For example, employees in the top 25% of the talent pool tend to bring in at least an extra 25% in profit. So where an average hire will bring you $80,000 in profit, a stellar hire will bring in a minimum of $130,000.
In this example, that's a missed opportunity of $50,000 from just one bad hire.
Formula 3. Recruitment marketing costs
Another way to arrive at the real cost of a bad hire is to take a closer look at your overall employer branding and recruitment marketing budget.
Let's say you're spending an average of $300 per month on advertising each open position.
If you have 10 open positions per month, that's a total of $3,000 on job ads alone.
Job advertising (A) = $300
Open positions (OP) = 10
A x OP = $3,000
But let's say you advertised for five similar positions just two months ago. If you have a system for automatically organizing and pre-screening applicants, you already have a pool of pre-qualified candidates to choose from.
Well done. You just saved 50% or $1,500 per month because you decided to hang on to your best recruitment leads instead of heading back to the job boards for every new position.
If you use an ATS with a robust reporting feature, make sure you're tracking which hiring sources give you the best quality candidates so you can further optimize your recruitment spend.
Formula 4. Employee turnover rates
The impact of a bad hire on employee engagement and productivity is undeniable — but it's also notoriously tough to measure.
One way is to take a closer look at your employee turnover rates.
Number of regrettable departures (ND) = number of employees x annual turnover percentage
Average cost of those departures (C) = cost of hiring + cost of onboarding and training + cost of learning and development + cost of time with unfilled role
ND x C = Annual cost of turnover
Let's say you're a 100-person company with a 10% annual turnover rate.
ND = 10
You spend $20,000 per person on hiring, $10,000 on each for onboarding, learning, and development, and lose $40,000 in average lost productivity due to the time it takes to refill a role.
C = $70,000
Your annual cost of turnover would be approximately $700,000 (ND x C).
That’s a high number. But rather than let these figures get you down, think about the alternative.
How much more could you gain by taking measured action to improve your hiring process and team culture?
The best way to deal with bad hires
So you made a hiring mistake. Don’t worry, we’ve all been there.
Instead of beating yourself up, consider how you can use this opportunity to make the experience better for everyone.
Have a one-on-one discussion
There’s a difference between someone who throws red flags constantly and clearly doesn’t want to be there, and someone who has the right motivation and potential, but just needs a little guidance.
Before you fire off that termination letter, take the time to figure out if there’s another missing piece to this puzzle.
Start by opening up a dialogue asking the employee specific questions about their role and the expectations surrounding it. Ideally, this will help both you and them recognize any discrepancies or miscommunications that could be causing disruptions to the work. With a clearer understanding of what’s needed on both sides, you can work together to save — and even elevate — the relationship.
Act quickly, but don’t make a rash decision. More often than not a “bad hire” is actually just someone in need of a little coaching and direction.
Offer a graceful exit strategy
Sometimes, no amount of conversation can save a bad work relationship.
In this scenario, it’s best to stay true to your reputation as a caring and empathetic employer by orchestrating a graceful exit strategy.
You can offer the employee a fair severance package, gradually taper off their hours, or transition them from a salaried role into a freelance or contract position.
All of these approaches can help ease the individual out of the business while also mitigating the risks of hiring a new employee that wasn’t what you expected – on both sides!
Make prevention the priority
The easiest way to reduce the cost of any recruitment mistakes is always going to be to improve your hiring tactics.
At the end of the day, a bad work experience is painful for both the individual and the business. The best case scenario is to avoid the unpleasantness altogether by fine-tuning your recruitment process.
After the individual exits the business, schedule a meeting to connect with your recruiters and hiring managers, review the situation as a team, and identify ways to improve your processes for the future.
Chances are, the answer is yes. You just need to set aside a clear time and place for identifying and executing those changes.
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