Exploring the True Cost of a Bad Hire
By Maria Forbes
June 11, 2020
Recruiting new talent is an essential part of running a business. Whether your company is in the development stage or the maturity stage of its life cycle, you’ll have to spend resources on recruiting new talent. You should carefully screen candidates, however, before hiring them. If you hire the wrong candidate, it could cost your company in more ways than one.
According to the U.S. Department of Labor (DOL), the average cost of a bad hire is approximately 30% of his or her earnings during the first year. For an employee earning $40,000 during his or her first year, that’s $12,00. For an employee earning $90,000 during his or her first year, that’s $27,000. So, how can a bad hire have such a destructive impact on your company’s finances?
Finding a Replacement
When a recently hired employee fails to perform as expected, you’ll need to find a new employee with which to replace him or her. If you’re lucky, you may find a suitable candidate with minimal effort. On the other hand, it may take weeks or even months of rigorous prospecting and interviewing.
You don’t want to end up with another bad hire, so you should typically take your time when searching for a replacement. Regardless, the time it takes to replace the bad hire will cost your company money.
Even after finding a new employee with which to replace the bad hire, you’ll have to train him or her. Research shows that companies spend a little over $1,200 on average to train each new employee that they hire.
All new employees must be trained. Training requirements vary depending on the employee’s specific position, but your company will incur costs associated with the process. Training programs, for instance, often involve the new employee working under the supervision of a long-term employee or manager. Therefore, the long-term employee or manager will have to divert his or her attention away from other tasks to provide training.
In addition to finding and training a replacement for the bad hire, your company will have to spend time and resources on onboarding. Also known as organizational socialization, onboarding involves introducing and acclimating a new employee to your company’s workforce and its culture. Like with training, onboarding takes time and resources, so it can increase the cost of a bad hire.
A bad hire can harm your company’s productivity. After all, most business owners consider unproductive employees as “bad hires.” A new employee may show up to work late, take extended breaks or simply fail to perform as expected. When instances such as this occur regularly, it’s safe to assume the new employee is a bad hire.
A new employee may have years of experience, but if he or she isn’t productive, you should consider looking for a replacement. Keeping the bad hire on your company’s payroll will only cost your company money in the form of lower productivity.
Lower Employee Morale
A single bad hire can lower the morale of your company’s other employees. According to a survey of over 2,100 Chief Financial Officers (CFOs) conducted by Robert Half, over nine in 10 said that bad hires have a negative impact on the morale of their respective employees.
Unproductive employees often have a negative attitude that can spread like wildfire throughout your company’s workforce. Other employees will notice the bad hire’s disposition, which may result in lower morale. And with lower morale, employees won’t perform to their fullest potential. This is just one more way that a bad hire can adversely affect your company and its finances.
A lesser-known impact of a bad hire is damage to your company’s reputation. Employees are a reflection of your company’s culture. If your company has unproductive or unmotivated employees, it will reflect poorly upon your company’s reputation.
You can’t put a price tag on the damage to your company’s reputation caused by a bad hire. As your company’s reputation becomes tarnished, fewer customers will want to buy its products or services. At the same time, you’ll have to spend more money on advertising and marketing to account for this loss of sales.
Loss of Customers or Contracts
Your company may lose some of its long-term customers or contracts if the wake of a bad hire. When a bad hire fails to provide a friendly and positive experience for a customer, the customer may leave your company in favor of a competitor. Whether your company operates in the business-to-consumer (B2C) or business-to-business (B2B) industry, a bad hire can cost it customers or contracts.
Hiring new employees always requires a leap of faith. You can ask all the right questions during an interview, but you really won’t know how a candidate will perform until you hire him or her. The good news is that you can improve your company’s hiring practices to lower the risk of bad hires.