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The Cost of a Bad Hire

Entrepreneurs and human resource managers obsess over hiring. To find people with the best skill set and cultural fit, hiring managers analyze handshakes and resumes, invest in personality assessments, and engage in internet sleuthing. Yet despite these efforts, bad hires happen. In fact, according to research by Glassdoor and the Brandon Hall Group, 95% of companies admit to recruiting the wrong people each year. And more than one-third admitted that they were unaware of how costly hiring the wrong person can be. When you make a hiring decision, after weeks of interviewing and on boarding, and that employee leaves the company, it effects your bottom line. Making a bad hiring decision might seem like a temporary setback, but oftentimes, it can impede growth and effect culture longterm.

The real cost of a hiring mistake

The Chartered Institute of Personnel and Development (CIPD) has estimated that one bad hire can cost an organization as much as 2.5 times what that person makes in a year, after accounting for recruiting, replacement, and onboarding expenses.

The financial impacts of hiring the wrong person are quantifiable, but many professionals believe that the worst damage comes from the impact on morale and productivity. Good employees get burned out making up for the bad apple that isn’t pulling his or her weight. Bad attitudes spread like a virus. Before you know it, your company is in danger of losing your top performers, too.

So, what, we ask, is the overall cost of a bad hire?

Why do bad hires happen?

With so many companies admitting to recruiting the wrong person, you may think that making bad hiring decisions is unavoidable. Companies invest so much into the hiring process. Does finding the right person just come down to good luck in the end?

We don’t believe so. The majority of hiring mistakes are the result of poor decisions. People recognize candidates lack the necessary skills and experience but make offers anyway because they can’t bear to look at another resume or conduct another interview. When the number of resumes or the pool of candidates is not as good as they were hoping for, they’ll hire the best of the lot and hope it works out due to a need to fill the position. Pressed for time, people don’t bother checking references, believing that most former employers won’t give honest feedback anyway.

Filling open positions can be difficult, but with the quantitative and qualitative costs of making the wrong choice so high, a bad candidate can be even worse than no candidate at all.

Nobody wants to hire the wrong person. You’ll spend time and money on training and trying to help them fit into the organization. Often, that time and expense are wasted because the individual will leave your organization soon –voluntarily or otherwise – and you’ll be forced to find a replacement. And that’s not even the real impact of a hiring mistake.

While you’re spending time trying to coach an bad hire into acceptable performance, what is the rest of your team doing? The classic management guide First, Break All the Rules by Marcus Buckingham and Curt Coffman, makes a point that paying more attention to struggling employees and less attention to your stars alters the behavior of your top employees. Those top performers may start doing less of what made them stars in the first place.

Even if their behavior isn’t impacted, their attitude might be. Often, a bad hire leaves your good employees with the burden of extra work to make up for the poor performer. That added pressure puts you at risk of losing your star performers, too.

The Society for Human Resource Management suggests the cost of turnover can run as high as $150,000 for an accounting professional. Does that figure seem high? Of course, the financial costs – salary, recruiting expenses, severance pay, signing bonuses and relocation – are not too difficult to quantify. It’s the collateral damage to productivity, morale and your reputation that might surprise you.

How to attract and retain the right people

Your business’ reputation is key to attracting the talent you need. But a hiring mistake can put your credibility at risk in more ways than one.

  • Your team may voice concerns about the organization and its personnel decisions to family, friends and professional contacts.
  • Clients encounter a rotating cast of characters in your business and become concerned about your company culture or stability.
  • A bad hire may leave negative reviews of your brand or business on websites, social media outlets and discussion forums.

When the pool of candidates is diluted with mediocre prospective hires, how does a company attract and retain the best people? Competitive salaries and benefits are the first steps. Here are others:

Have a strategic plan.

Without a plan, what do you tell prospective hires about your company’s future? Smart people expect documented strategies and a game plan. Keep it straightforward and easy to communicate. Hiring, training and managing the new staff member takes time – time that would otherwise be spent on essential business tasks and operations. When you hire the right person, that initial loss of productivity ends up paying dividends in the long run. But hiring the wrong person may mean you’re spending more time on training, dealing with personality conflicts and correcting unacceptable behavior – just to start all over again with someone new a few months later.

Know what you want.

Have documented job descriptions for every position. You have to know what you want before you can find it.

Invest in training and development.

These aren’t a perk – they’re an expectation. Training and learning are about more than just technical competence or continuing education hours. They’re about career growth and the development of leadership skills.

Train your managers.

Competent managers that understand people are critical for retaining your best employees. Your managers need training as much or more than any other employee. Provide the best technology. The cost of tools that help your employees do their jobs and serve clients are a small price to pay to please valuable employees. The best employees expect the best tools.

Offer authentic work/life balance.

The way the workforce views perks is changing. Flexible work hours and telecommuting policies show that you understand that employees place just as much importance on spending time with families and pursuing passions as they do on earning money.

Accounting and finance departments deal with challenges every day. You can reduce or eliminate the challenges that come from making bad hiring decisions. Even if your existing staff has to pick up the slack for a while longer, this burden is temporary and far less costly and damaging than hiring the wrong person.

For more on how to recognize good vs. bad accounting and finance talent, check out our infographic.

Accounting-Principals-Graphic-edit2

That damage can be long-lasting and difficult to overcome.

It may not be possible to avoid bad hires entirely, but you can reduce them substantially by taking steps to ensure you’re bringing on the right people. For instance, if you’ve had trouble hiring people with the right technical skills, consider adding a skills assessment to the interview process. If the personalities of your new hires are a source of ongoing frustration, consider whether you have the right people doing interviews and explore pre-hire personality and behavioral assessments.

In the end, the most effective strategy for reducing turnover costs is to implement recruitment strategies designed to find the right technical, behavioral and cultural fit for the role you need filled. Investing in the recruitment process up front can save you far more than just the cost of hiring a replacement.

Check out our tool to calculate the cost of a bad hire!

Author

Accounting Principals

We're Accounting Principals--a leader in finance and accounting staffing. In fact, since 2010, we've been part of Adecco Group, a Global 500 company and leader in staffing services around the world. But this isn't staffing as usual. We take quite a different approach than most staffing agencies. A people-focused approach. We believe in forming real relationships with both our clients and our candidates. We want to understand the needs on both sides.

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