What are bad hires costing your company? The real cost of a bad hire can be hard to quantify, but it’s probably more than you realize.
In a recent CareerBuilder survey, 75% of employers said that they’ve hired the wrong person for a position at some point in their career, and that the consequences of their mistakes went well beyond just the cost of hiring.
Read on to find out what bad hires may be costing your company and see what you can do to fix it.
Hiring is Hard…and Expensive
American companies are facing a labor shortage. According to the U.S. Chamber of Commerce, 7.2 million unemployed Americans were actively seeking work in the summer of 2024. Simultaneously, employers sought to fill 8.2 million vacant jobs.
There are a lot of reasons for this—shifts in workforce demographics, changing expectations about work-life balance, and, in more than a quarter of all cases, the absence of a need for paying income.
This math all adds up to an exceedingly challenging hiring environment for growing businesses. In the simplest terms, we currently have more open jobs than we can fill domestically. If you are in the business of hiring employees, you understand this problem profoundly well.
You know how difficult it has become to attract qualified candidates, to compete with other employers for their skills, and to retain strong hires in the long term. And no doubt, you also understand that these factors are making the process of hiring more costly, which, in turn, makes hiring new employees riskier.
Generally speaking, a good hire is worth their weight in gold. But a bad hire will cost you a fortune.
To an extent, you can probably do the math yourself. How much are you spending, per new hire, on costs like recruitment, interviewing, background checks, onboarding, salary, and benefits?
The truth is, though, that these costs really only scratch the surface. A bad hire can certainly cost you capital in a very few concrete and quantifiable ways. The impact on your company culture, morale and productivity are less obvious, but it may be profound, and quite costly.
The Cost of a New Hire
Let’s first consider what it costs to make a new hire in the first place. And let’s also assume, for just a moment, that everything goes according to plan with your new hire. Let’s assume this new addition is a stellar cultural fit, a quick study, and generally reliable for a funny, work-appropriate one-liner during your team’s weekly Zoom meetings.
Under those conditions, what are you spending on a new hire?
- Job Posting: Forbes reports that an employer may spend more than $4,000 per employee just for posting and advertising on job sites.
- Recruiters: Indeed says that if you plan on enlisting the help of a recruiter, you can expect to pay a commission of roughly 15-30% of the hire’s base salary. So if your new employee starts at $50,000 per year, plan on paying the recruiter an additional $7,000 to $15,000.
- Human Resources: Your HR department must be actively involved in the hiring process at nearly every step of the way. This expense is a little more difficult to quantify due to the high number of variables including the size of your HR department, your industry, and the experience or seniority of your HR personnel, as well as the actual number of working hours your HR department spends on vetting, interviewing, reference checking, and onboarding candidates. According to the Bureau of Labor Statistics, the median annual salary for HR managers was $136,350 as of 2023.
- Background Checks: Indeed reports that basic background checks start at $10, while more thorough background checks may cost around $100 per employee.
- External Testing: Indeed also notes that many businesses will invest in personality assessments and other diagnostic tools, which may vary widely in price, but typically begin at $50-$100 per employee. Costs can go upward precipitously from there for customized assessments.
- Onboarding and Training: Depending on the nature and complexity of the job, it is expected that your new hire will require an adjustment period. During this time, you are paying the employee’s salary without yet receiving productivity in exchange. This is normal, but also costly. Expect to sacrifice between $2000 and $6000 per employee on lost work time as well as training resources (i.e. instructors, materials, certifications, etc.).
It’s important, at this point, to take a step back and consider two facts.
- First, the expenses above don’t even begin to account for compensation, health benefits, 401(k) matching, social security taxes and, where applicable, relocation expenses.
- Second, this is what it costs if everything goes right.
But what if it doesn’t go right? What’s that going to cost you?
The Cost of a Bad Hire
An article from Business News Daily cites the average cost of a single bad hire at somewhere between $15,000 and $17,000. But that feels a little low, doesn’t it? It’s true that you can begin to quantify the cost of a bad hire by adding up the expenses bulleted above.
At a minimum, each hiring mistake will cost you what you’ve spent on the hiring process as well as compensation and benefits for the duration of the employee’s tenure, however brief. According to an article from Business.com, you can expect the cost of a bad hire to be roughly 30% of the employee’s first year earnings.
Of course, the raw number will vary widely depending on the role in question. Suffice it to say, hiring a bad manager will cost you more than hiring a bad associate.
Even still, these costs form just one part of the picture. The bigger picture is your organization as a whole, and the impact that just one bad hire can have.
The Ripple Effect of a Bad Hire
According to business.com, the cost of a bad hire can actually range from $240,000 to $850,000 per employee.
Why such a high variation? Well, again, there are a number of reasons owing to the nature of a given job role, salary range, and hiring procedures. But even then, there are unseen costs that come with a bad hire at any level.
A bad hire may carry less tangible costs—negative impacts that may be a little harder to detect, let alone readily quantify.
But make no mistake about it—these less readily apparent costs can be far greater than you realize, and far greater than just the hiring costs alone. This is because poor fit and poor performance have a way of rippling outward, of impacting the work of others, of ultimately permeating processes, production, reputation, and the company culture at large.
A survey from CareerBuilder asked employers to identify some of the most common ways that bad hires impacted their organizations more broadly. Their responses are revealing.
- Productivity: 36% said bad hires led to less productivity for the business as a whole.
- Quality: 33% of respondents said that bad hires compromise the quality of the organization’s work.
- Morale: 31% of respondents said that bad hires had a negative impact on employee morale.
- Replacement: 30% of respondents said that bad hires resulted in lost time and money–both spent recruiting and training their eventual replacements. Gallup says the cost to replace workers who quit is usually anywhere from one-half to two times the workers’ salary.
- Reputation: It is perhaps most difficult to put a number on the cost to your reputation of rude sales associates, production workers who miss deadlines, or managers who misrepresent your business to prospective partners. Indeed, you may never know how many opportunities, prospective leads, or repeat customers might have been lost as a consequence of your bad hire’s actions or inaction.
Naturally, you can see how these figures might be difficult to quantify. You might not even realize some of these things are happening. But you can probably see how it can all add up, how a single bad hire in a mid-level position could end up costing your business tens or even hundreds of thousands of dollars.
Worse yet, you can perhaps extrapolate the impact that a flawed hiring system might have on the viability of your business writ large.
How do bad hires happen?
According to CareerBuilder, one of the common themes for companies with inconsistent hiring outcomes is a preponderance of subjectivity in the recruitment process. We’re all familiar with those good old fashioned interview questions: Where do you see yourself in five years? What would you describe as your biggest weakness?
Naturally, a candidate who has been on a few interviews will be prepared to respond to these cliched questions with canned answers. More problematically, these answers will tell you very little about the candidate’s work habits, team building skills, leadership traits, etc.
This is just one of the reasons that we’ve worked at SuccessPortraits to create meaningful diagnostic tools aimed at reducing the role of subjectivity in the hiring process. Our workplace assessment tools score prospective employees on 19 distinct traits that, taken together, paint a portrait of potential compatibility.
Our testing instruments don’t assess employees based on whether we believe they are qualified for your job. SuccessPortraits simply provides an objective way of understanding more deeply who your potential hires are, how they work, and whether they are a good fit for your company, culture, and the future.
What you do with that information, and how much capital your company saves on hiring, is up to you.