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The True Cost Of A Bad Hire

Updated on Jul 02, 2020 979 views
The True Cost Of A Bad Hire

Have you ever hired a candidate who showed so much promise during the interview, but after hiring them you realized that they are the worst thing to ever happen to the company?

What did you do when it happened? Did you fire them at once or try to reform them?

Calculating your quality of hire and cost of a bad hire can help you get the best talent for your firm.

Making a bad hire is a common mistake made by even the best hiring managers, a harmless error at first, but the effects can be quite devastating especially if you decide to keep that bad hire on your team.

However, a bad hire will cost your company a lot, whether you decide to fire them out rightly, or keep them for sometime. 

And that is why it is important that you learn to calculate the true cost of a bad hire using our calculation below:

In calculating the cost of a bad hire, I am going to share with you a forumla that you should be using. The formula is

How To Calculate The Cost Of A Bad Hire

If this formula scares you, don't worry. I will bring it down in detail below.

 

Dealing With Bad Hires And Terrible Hiring Decisions

As a recruiter, while hiring a candidate for your company, it is advisable and cost-effective that you hire a candidate who doesn’t just have plans to stay with your company for the long haul, but is also the right fit for the position you are hiring for and your existing employees.

Not only is this important to the growth of your business, but it is also cost effective as the cost of a bad hire is high.

The cost associated with hiring the wrong candidate for your company, possesses a threat to large and small companies alike, and has the capacity to sink a small business,  as well as 30 % of the bad employee's first-year earnings.  

Although most prominent companies can't put a price tag on how much poor performing workers have cost them, they can confidently state that they have lost thousands and millions due to hiring the wrong person.

So, what is the true cost of a bad hire? This article will answer this question, and also give you tips on how to avoid hiring the bad egg that can cause your other employees to rot.

 

In This Article:

So that you know what you are up against, and is fully prepared for it, in this article we will discuss:

  • Why Recruiters Make Bad Hires

  • The True Cost Of A Bad Hire

  • What Happens When You Hire The Wrong Person For The Job

  • How Much Money Does A Bad Hire Really Cost You?

  • So You Hired The Wrong Person, Now What?

  • How To Make Better Hires

 

Why Recruiters Make Bad Hires

Just like Rose did, if you've made one or two bad hires that didn't exactly go as planned, then it might do you well to know that you aren't the only hiring manager/ HR officer to make this mistake. 

As a matter of statistics, companies hiring the wrong people for the job is a common mistake made in the corporate world, albeit due to a number of factors like:

 

1. Talent Shortage:

63% of recruiters say talent shortage is their biggest problem when it comes to hiring.

Why can't recruiters ever seem to find the right talents for their jobs?

  • 63% say that it is because they can't find a suitable candidate to fill the vacant role.

  • 42% say that candidates don't respond to calls and emails.

  • 34% say they can't find passive candidates who are employed, but wish to try new job opportunities.

  • 23% of recruiters say they can't find talent because they receive too many junk resumes of unqualified candidates, from job boards.

 

2. Long Hiring Processes

56% of recruiters blamed lengthy hiring procedures as the reason why they can't employ good talents. Candidates don't exactly want to complete an application process that lasts more than 20 minutes.

Most times, you are likely to miss a good candidate, because you wear them down with your company's long recruitment process, that they got bored and went to another company who was faster at employing them than you.

Another thing that can elongate your hiring process is the number of interviews you choose to have before hiring the candidate. This what recruiters had to say about that:

  • 51% of recruiters say they have to conduct 3 interviews before they hire a candidate.

  • 22% vote for 4 interviews before making an offer.

  • 17% of recruiters say  two interviews is enough to make an offer.

  • 9% say 5 or more interviews should be conducted before an offer.

  • 1% of recruiters say that 1 job interview is enough for them to seal the deal.

How many interviews were conducted before a rejection by the candidate?

  • 45% of recruiters said there was rejection after 3 interviews

  • 20% said it was after 2 interviews

  • 17% said it was after 4 interviews

  • 4% said it was after 1 interview

  • 4% say it was after 5 or more interviews

 

3. Rejected Job Offers

Hurts doesn't it,When a potential candidate who you already imagined chatting with by the water dispenser, rejects your job offer, thereby shattering your dreams. 

Have you ever been ghosted by a candidate before, especially if they were part of your KPI for the month? I hear it's worse than being ghosted by a person you thought you were in a relationship with (yikes!)

Why do you think candidates reject job offers? Here's why, according to recruiters:

  • 32% say it's because the candidate accepted another job offer.
  • 25% say it's because the compensation their offering the applicant is  too low.
  • 15% say that the candidate was poached by a competitor.
  • 5% say that the candidate never confirmed their rejection or acceptance of the offer.
  • 2% say it's because of limited promotion opportunities and finding a career path in the job.
  • 2% say candidates rejected the offer because it didn't have flexible work hours.
  • 2% say it's because of an inadequate or no relocation package.
  • 6% say it's due to other reasons mentioned by the candidates.

 

Now that we have statistics out of the way, let's get to talking about the scary stuff. You made a bad hire, what's it truly going to cost you?

 

The True Cost Of A Bad Hire

Ever heard the expression "One bad apple spoils the bunch?"  What about "evil communication corrupts good manners?" 

The point of these idioms is, when you make a bad hire, it is possible for that bad apple to corrupt his colleagues with his poor work ethics. How does this happen?

Bad hires are generally not suitable to work for any company, because they lack good work ethics, a repelling attitude to work, and are often disengaged and disinterested in their work. Employees like this are dangerous, and having them around your hardworking and engaged employees, can ultimately corrupt the good ones, ergo "one bad apple".

The true cost of your bad hire is that him slacking off on work, will make genuine employees burn out, trying to pick up his slack. If he is performing poorly in a team, his teammates will have to take on extra workload  to make up for it, so that it doesn't look like that team as a whole is not doing well. This is double the stress.

The second true cost of a bad hire is the destruction of a positive company culture that took you long to build. How? A bad hire has a negative vibe towards work and the atmosphere around him is always dense and stiff, and any of your good workers who is around him, will be affected by this toxic atmosphere. Atmosphere is contagious  in a work environment, and a negative one spreads fast.

You've gotten a sneak peek into the trust cost of a bad hire, are you ready to know what happens when you hire the wrong person for the job?

 

What Happens When You Hire The Wrong Person For The Job?

After you've realized that the new promising candidate you just hired is actually not as good as you thought, you get a lot of ideas on how to correct this error in judgement you just made. 

Everything you think, boils down to "should I keep them or fire them immediately?" that might be too harsh. "Or should I give them the benefit of the doubt and train them into becoming model employees of the company?"

In the first few months of hiring them, you watch them closely like a hawk, take notes of their performance, and speak to their supervisor if need be. You do whatever you can to whip them into shape for the job.

Sometimes, this strategy might work and you can actually turn them into good hires for your company, but other times it doesn't pan out as planned. Those other times it doesn't pan out, keeping that bad hire for longer will sap you of a lot of your resources, and would have cost you some good money before you eventually let them go.

You want to know what happens when you hire an unteachable wrong person for the job and keep them? We'll tell you.

 

1. You Lose Productivity

Productivity is a rare gem given to companies by employees. It's what drives the company's vision and objectives forward, and brings in revenue to the company.

You need all the employees in a company to be productive, and if one of the workers (i.e. a bad hire) disrupts this sequence, the productivity flow will definitely suffer.

In addition, while you try to train and micromanage the bad hire or resolve petty rifts between them and their advisors, you spend the time and energy you were supposed to allot to other employees and customers, thereby causing the business to suffer.

A bad hire results in less productivity, less sales, and costs you all your time.

 

2. You Lose Money

According to statistics, bad hires can cost up to $240,000 (N93,000,000.00) in expenses, which is broken down to the cost of hiring,  pay, and retention. 79% of companies that hired the wrong person admitted to losing $14,900 (N5,773,750.00) for each bad hire.

When you have a bad hire on your team, who isn't doing their job, you still have to pay them their salary, which means you're basically paying for nothing. You pay for extra training for them, and when you decide to let them go, you have to cough up more money for their severance pay.

You want to know something else? You still have to spend more money to search for, hire, and train a new employee to take up their position.

 

3. Employee Morale Reduces

Focusing all your attention on training and managing one employee, takes a toll on the morale of your other employees. And because you don't take the time to check in on them, and handle issues they might need to resolve, they may begin to feel disengaged and unsatisfied.

When they feel this way,  they lose interest, become less productive, and ultimately lose morale.

 

4. You Lose Reputation

Prolonging the employment of a bad hire you can't teach, will take you for everything you have (not literally), including your reputation and the trust of your customers.

If this bad hire happens to be in a position where they have to directly deal with customers, and manage them, then you will have unsatisfied customers.

Another way a bad hire can cost you your reputation is by making you lose potential candidates. How? If a bad hire causes a bad experience for other workers in your company, they can go online and live bad reviews on your site about the company. This review will be read by applicants who would consider your company a red flag.

Do well to monitor reviews about your company, so that you don't lose good candidates because of one bad hire.

We've covered what happens when you hire the wrong person for the job, and keep them even after they keep performing poorly. Next, we are going to look at numbers, that's basically how much you would be losing for keeping that bad hire.

 

How Much Money Does A Bad Hire Really Cost You?

If you have been following this article closely, then you would see the figures of the amount of money having a bad hire in your office will cost you. But, there is no need for you to panic, or wrack your brain on how to shell out $240,000 or $14,900 dollars.

There is a way for you to calculate how much money a bad hire really costs you, so that you know what you should be paying.

Cost of bad hire calculation:

(TS×HR)  + (R×APC) + (AD × JP) + (ND × DC)

  • TS - time spent on hiring
  • HR- hourly rate
  • R- employee revenue
  • APC- average profit contribution
  • AD- cost of job advertisement 
  • JP - available job positions
  • ND - number of regrettable decisions
  • DC - average departure cost

To get the sum of each element for calculating the cost of a bad hire, follow the steps below:

 

1. Calculate Time Spent On The Hiring Process

The first way to calculate the cost of a bad hire incurred by your company is to calculate the amount of time you spent hiring that candidate.

  • Rally around all the members of your hiring team.

  • Find out how many hours a week, they allot to hiring and recruitment duties.

  • Multiply the number of hours by the team members hourly rate.

Example: 40hrs/week x $30 per hour = $1,200 per week.

You can decide to shed the workload of your hiring team and money you spend, by using a recruitment tool like an applicant tracking system (ATS), it will help you get through candidates faster, and you won't have to pay the system by the hour.

 

2. Calculate The Revenue Made By Each Employee

The second way to calculate cost of living is to: 

  • To get each employee's revenue, you can check your company's yearly financial records.

  • Multiply the revenue per employee by the average profit contribution percentage to the company, to get an estimate of the profit margin.

Example: if  your revenue/employee  is $300,000when multiplied by the average profit contribution of  40%, each employee should make you approximately $120,000/year. However, employees that contribute extra to their average percentage, should make you extra money, above the average.

 

3. Calculate The Cost Of  Advertising Job Positions

If you spend $400 a month, to advertise one job position, having 10 job positions open for advertisement, will cost you $4,000 on job advertisement.

Formula:

  • Job advertisement: $400/month

  • Available job positions: 10

  • Job ads x job positions = $4,000

Advertising for jobs obviously costs money, and every one who has been in the hiring game for long, knows that the more jobs you advertise the more you spend. 

Want to cut back costs and save money? Why not get a system that allows you to store the data of candidates you interviewed in the past for a similar job role? From the data you already have, you can pull out the information of suitable candidates, and interview them for the new job, instead of paying more money for advertisements.

 

4. Calculate Workers Turnover Rate

Determining the impact of a bad hire on employee productivity and engagement can be difficult to measure in numbers. But, a way to do this is to scrutinize your turn over rate.

Formula:

  • Number of  regrettable departures = number of employees x annual turnover rate percentage

  • Average departure cost = cost of hiring +  cost of onboarding cost of learning and development + cost of time with unfulfilled role

  • Number of regrettable departures x average departure cost = annual cost of turnover

Sample Calculation:

  • 100 employees x 10% annual turn over rate : ND = 10

  • If you've spent $10,000/person on hiring + $20,000 on onboarding , learning and development, and lose $30,000 in average lost productivity , due to time wasted in an unfulfilled role. Your average departure cost = $60,000.

  • 10 (ND) x 60,000 (AVDC) = $600,000. $600,000 is your annual cost of turnover.

 

Note: Use the given formulas, but calculate, using the prices and currency that works for you. These are just sample prices and don’t represent the amount of any particular company or sector.

You’ve seen how much a bad hire can cost you, what then will you do with the one you have in your company and how do you stop them from costing you more money? Our next section will explain that.

 

So You Hired The Wrong Person, Now What?

Uh oh! I think I might have hired the wrong person for this job, what am I going to do now?”

After you’ve hired the wrong person for the job, it may take a while for you to realize that they are not a good fit for your company. And when the realization hits you, you might go into panic mode as you struggle with the best course of action to take that will benefit you, the company, and the hire in question.

If you’ve hired the wrong person, here’s what you can do.

 

1. Identify What Makes Them A Bad Hire

A bad hire for the job, maybe hiding in plain sight, and unless you are able to spot them on time, and have tangible results that they are indeed a bad hire, and not just in need of extra assistance to master their job, they could cost your company a lot.

To identify what makes someone a bad hire and not a struggling employee, you have to look out for these common red flag:

  • Your newest employee didn’t measure up to standards when it comes to quality of work.

  • They lied to you about possessing a skill they clearly didn’t have.

  • They don’t play well with other employees.

  • They have a negative vibe and generally can’t fit into the company culture.

  • They weren’t consistent with showing up for work.

 

2. Ask Yourself If They Are Really A Bad Hire Or If It’s Your Fault

This might come as a shock to you, but most times a new employee who performs badly, might be doing so because of the way you brought them onto the team.

Before you point accusing fingers at them, you have to make sure that their poor performance isn’t actually your fault or from holes in your hiring process. Ask yourself these questions:

  • What duties did we want this person to perform? Did we communicate that clearly in the job description?

  • Is the job they are doing now, what we said they would do?

  • How did we onboard this person? Was there something wrong with our onboarding process?

  • From the start, did we set this person up for failure or success?

If answering these questions points to the realization that you are the reason why your new employee is performing badly, then you may need to change your approach to how you are managing them. You can offer extra coaching, in office mentorship programme, job shadowing, and career development resources to help the person improve. 

Don’t be so quick to fire a poor performer as a little guidance and patience, may just be what they need to settle into their role.

 

3. Reform Them

Once you’ve identified why a candidate is a bad hire, rectified the cause of their poor performance, the next move would be to reform them. How do you reform a bad hire?

If their problem is violating office culture and rules, then you may need to have a one-on-one discussion with them, explaining why the rules must be followed, and which of their recurrent behaviour is in violation of  the policy.

If the candidate is struggling performance-wise, then you should look at which resources you can offer them, to help get them up to speed with their work. You could also evaluate the expectations you had for them, and how it negatively affects their performance. 

You can’t expect a new candidate who needs more time to adjust to their new role, to know everything about working for your company right off the bat.

 

4. Cutting A Bad Hire Loose

Breathe. You have struggled with keeping the bad hire or letting them go, and now you’ve run out of time and need to come up with a decision fast before you lose more money and employee productivity.

Okay, we’ll say it, here’s when and how to cut a bad hire loose.

When: you can fire a bad hire, if you’ve done everything you can, to mould them into suitable employees of your company. And by this we mean, you have provided extra training for them, coached them personally, gave them a supervisor to mentor them, and let them shadow your best employee, and yet they refuse to improve.

How: cutting a bad hire loose, isn’t something you rush into. You don’t have to fire them immediately, but can give them some months to get onboard with the office work.

However, if the person’s problem is more of an attitude problem and they are making the workplace toxic, and influencing the productivity of other employees or causing them to quit, then cut them off immediately.

 

You’ve finally fired a bad hire, how do you prevent the same mistake in future? How to make better hires, will teach you that.

 

How To Make Better Hires

To prevent getting a bad hire next time, there are some measures you can take to foolproof your hiring plan, so that only sound employees are recruited by your company.

These are some steps you can take to make better hires:


1. Trust Your Instincts

Instincts and intuition doesn’t lie. If you interview a candidate who has a negative vibe, or just rubs you the wrong way, then don’t hire them, or you’ll have a hard time when you want to fire them.

During interviews, just look for red flags like their relationship with their ex-boss, why they are living their current job, and how they answer interview questions. 

You can also have other members of your team, so they can access the candidate while you ask them questions.


2. Contact Their References

If you are not too sure about the candidate’s work background, you can take them up by their word, and contact the references they put up in their CV or resume.

Although most references lie about the candidate, talking to someone that knows them on a professional level, and have worked with them before, will save you a whole lot of trouble, should their character and work ethics be bad. 

 

3. Get An Expert To Supervise

When interviewing a candidate for a job you know nothing about, to ensure you get the best talent with the capacity to do that job, invite a member of your company who is an expert in that field, and have them oversee the interview process.

Since this member knows how their department works, they would know what type of personalities can match that of the existing workers, and the type of skills required for the job. 

The leader’s input can also make it easier for you to narrow down potential candidates, because you already know what you are looking for.

 

4. Have A Probation Period

If a candidate wants to be considered a suitable employee of your company, then they need to work hard towards being seen as such. There are two ways they can prove this.

The first way is to give candidates tests during the interview, and evaluate them based on how they perform. An example of such a test, is to ask a customer care candidate to have a trial phone call with an agitated customer, to see how they do.

The second way is to have an old-fashioned probationary period. Within the given period, the candidate will be watched closely, and during the end, they will be assessed and you can now decide if they move on to become full staff or not.

 

5. Set Clear Expectations

Knowing what you want from a candidate, and the expectations you have for them, makes it easier for you to communicate these expectations to the candidate, when they start working for the company.

Have clear expectations, tie the success of the candidate being retained to these expectations, and fire them if they don’t meet them. Better to fire early, than to prolong it.

 

6. Hire Skilled Candidates

In order to get suitable hires, you have to think outside the box about finding the right fit for your company. By thinking outside the box, we mean you should shift the focus from the candidate’s experience, to their skills.

Focusing on skilled candidates, provides you with more options to choose from, and more talent to explore. Guaranteed, candidates need certain industry-related skills to do a job, and hiring them for important transferable skills like communication, leadership, resilience, and problem-solving, helps you pick candidates that can move your company’s future forward.

 

7. Train Them Young

Don’t just hire candidates and then leave them to their fate. Don’t say, “after all they can do the job, they don’t need me to teach them anything”.

Before your new hires experience or not swing into action, do well to give them a little hand holding, and extra training, until they learn how to use their talent in a way your company can benefit from.

If you want suitable candidates, then make onboarding and training a part of your hiring process. It is better you train a good but inexperienced candidate, than hiring an experienced bad hire.

 

8. Put Resources In Place

Hiring for your company isn’t something you should rush into, because you need someone “urgently”, it’s something that should be done only when you are sure you have the right resources to turn those applicants into sound employees of your company.

That being said, have resources in place, whatever it is you can get your hands on that can help your newest hires, and  use it to the best of its capacity to train them.

 

9. Repurpose The Bad Hire

Sometimes, you can hire the wrong person, but later find out that they are actually qualified to do another job within your organization. When this happens, the smart move would be for you to redirect them to that department which they have the capacity to work in.

So, if you hired them for a sales job, but realized that they make a better fit for customer service, save you and them the trouble and use them as customer service representatives. 

Keep in mind, that this works if they have a skill or qualification problem, not a skill problem.

 

10. Use A Hiring Agency

If your HR team isn’t that solid, or you don’t have the time to sort through hires, you can simply use an outsourcing service like ours to get the best candidates for your job.

A recruitment agency like MyJobMag, offers the best recruitment services, and knows how to get you the best candidates for a wide talent pool that we possess. 

With us, you know you’re getting someone good, because our experts take the time to weed out the unwanted candidates, and sort through the chaff before we send them over to work for you.

Visit our outsourcing page now, and you can get the employee of your dreams, for a reasonable price.

 

One bad hire, doesn’t mean you are bad at your job, you made a mistake and if you fix it on time, then the damage done to your company’s productivity and revenue will be minimal. Try as much as you can to put standard hiring procedures in place, and offer resources to help train new hires.

 

Further Reading:

What is Recruitment: A Complete Recruitment Guide to Hiring the Smart Way

The No Nonsense Guide to Small Business Hiring

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