The True Cost of a Bad Hire

It doesn’t matter if your organization is large or small, public or private: At some point, you will make a bad hire. Maybe it’s someone who just doesn’t fit the culture; or maybe it’s someone who doesn’t have quite the skills needed for the job. Or maybe it’s someone with a misleading résumé. Hiring is a human activity, and there’s always a window for error and deception.

Cost of a Bad Hire

But even if bad hires are a given, we shouldn’t be complacent about them. In fact, bad hires are extremely costly. Anything that can be done to minimize the chances of a bad hire is certainly a worthy investment.

This conclusion came through loud and clear in a survey issued by a few years ago, polling over 6,000 hiring managers and human resource professionals from around the world. That study found that, besides the salary “wasted” on bad hires, companies incurred costs, both direct and indirect, in five additional ways:

  1. Lost worker productivity (reported by 41% of respondents)
  2. Lost time to recruit and train a replacement (reported by 40% of respondents)
  3. Added expenses to recruit and train a replacement (reported by 37% of respondents)
  4. Negative impact on employee morale (reported by 36% of respondents)
  5. Negative impact on clients (reported by 22% of respondents)

In the same survey, 27% of U.S. employers admitted that just one bad hire had cost their company more than $50,000. And the problem compounds with more employees. Zappos CEO Tony Hsieh restructured his company upon learning that bad hires were costing him well over $100 million a year.

A good rule of thumb, according to the U.S. Department of Labor, is to estimate the average cost of a bad hire as equal to about 30% of that individual’s first-year potential earnings. So a bad hire of a senior executive with a salary of, say, $120,000 could cost a company a total of $36,000 when everything has been factored in. That’s just a single hire.

Curbing Bad Hire Costs

So what can be done? We have to admit that bad hires are, in a way, inevitable: There is no single way to avoid bad hires, nor to recoup 100% of the costs incurred. But there are many ways to reduce the risk of a bad hire.

  1. Use multiple methods to select and screen your hires. Résumés can mislead, and references often sugar-coat the truth of a candidate’s poor performance. In fact, no one method is without flaws. But the more methods you use in hiring, the more data you collect — and the greater the chances of getting an accurate picture of a candidate.
  2. Make formal assessment one of these methods. Formal assessment, in the form of psychological tests, can give a clearer, less biased assessment of a candidate’s personality, skills, and competency.
  3. Use interview questions modeled on the competencies needed for the position. Too many companies “wing it” when it comes to hiring interviews. Know what abilities and attitudes are needed for the job, and develop interview questions that will uncover those.
  4. Look for a cultural fit. Not all bad hires are “bad apples” or poorly skilled workers. Sometimes there just isn’t a good match. Look for a cultural fit as well as a skills one.
  5. Get a small sample. If the position is such that you can see a portfolio or sample of work, ask for one. If that’s not the case, ask candidates to work with one of your teams on a small project that will take a short period of time (say, two weeks). Few things speak louder than how the candidate actually works with other employees.
  6. Start training and mentoring from Day 1. Training is important for employee success. And when it comes to getting a feel for a new hire, nothing beats a mentoring relationship. Do both. Your employees will appreciate it, and it can save headaches later.

Bottom Line: Bad hires are costly. If you would like us to help lower your bad hire costs, learn more about Psychological Associates assessments for hiring.

More blog posts by Hal Guterman, Ph.D.

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