5 Factors to Determine the Cost of a Bad Hire
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.
For entry-level employees, the turnover of a bad hire can be up to 50% of their salary. While bad hire turnover in a supervisory role can cost between 75%-150% of the position's salary. But what exactly goes into bad hire turnover costs? 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 someone from HR is spending onboarding that person and what their time is worth.
According to the U.S. Department of Labor, the cost of turnover is approximately 21% of an employee’s annual salary and benefits. 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 are losing about $15,000 per person.
That turnover figure is important to consider 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. According to a 2022 reporting, the average cost for re-location and travel assistance can be anywhere from $21,327 to $79,429.
While training is industry-specific and dependent on the size of the organization and the experience level of the employee, new-hire training and support usually start at $1,300 per employee. Did you send the employee to a training course? Or perhaps you had one of your experienced employees spend two days training them on the software? Typically, investing in training programs will save your team time and money in the long run, but not when it comes to a bad hire. New employees typically work at 25% productivity for at least the first 4 weeks on the job. Add this to the decreased productivity of the person(s) doing the training. Be sure to include both time and dollars spent on training the employee.
3. Decreased Employee Morale
Employee morale 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 distinct types of advertising, i.e., print, digital, job boards, etc. For example, LinkedIn charges on a pay-per-click basis to promote jobs so qualified candidates will see it. Of course, the more attraction your listing has, the more it will cost your company. On Indeed, you can agree to a set amount to pay per application for up to a certain number of applications. For example, if you pay $10 per application until you have 40 applicants, that would be $400 spent on advertising.
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 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.