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Five Factors to Determine the Cost of a Bad Hire

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Even companies with stringent interview hiring processes will occasionally hire someone that does not work out as expected. Each time a business makes a “bad hire” the bottom line is directly affected and the exact costs depend on the situation, position and industry.

The Harvard Business Review found that 80% of turnover was due to what the company deemed to be a bad hire–but what goes into that? While many people immediately think of the direct costs associated with an employee (benefits, salary, etc.), they should also be calculating additional ancillary costs as well, such as how many hours did someone from HR spending on-boarding that person and what is their time worth?

According to the Center for American progress, the cost of turnover can range from 16% to 21% of a person’s salary; that means if you let someone go who makes LESS than $75,000 per year (as 9 out of 10 people in the US do) then you’re losing about $15,000 per person.

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That turnover figure is important to take into account when you determine the price tag of a bad hire and you should know what goes into it. Here are five contributing factors to include in your calculations of how much your bad hire cost you:

1. Relocation, Salary, Benefits and Severance Paid to Employee

It is easy to calculate the actual dollars that you paid directly to the employee. Be sure to include any bonuses or relocation compensation that you paid in addition to any severance packages.

2. Training

Did you send the employee to a training course? Or perhaps, you had one of your experienced employees spend two days training him on the software? Be sure to include both time and dollars spent on training the employee.

3. Decreased Employee Morale

While it can be hard to quantify, having an employee that is not a team player and is let go, directly affects other employees. Decreased morale can lead to loss of productivity among workers along with reduced turnover, which makes the discussion around retention practices more important than ever.

4. Advertising Costs for Position

Once you let the employee go, you will have to advertise for their replacement. Be sure to calculate costs for all different types of advertising, i.e. print, digital, job boards, etc.

5. HR Time and Interviewing Time

Your HR department will have to spend considerable time reviewing applications, contacting applicants and setting up interviews for the employee’s replacement. Managers and staff who will be working with the new employee will likely be involved in the interview process and training. Be sure to include the time spent away from their typical work tasks in your figures.

Many companies are minimizing their risk of a bad hire by using skilled and screened temporary employees to help find the best fit for their position and company. By observing and interacting with an employee in your environment on a day-to-day basis while someone else worries about the overhead, you can more accurately gauge if that employee is a good fit for your organization and minimize the financial risk to your business.

 

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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