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The Costs of a Bad Hire

“If you think that hiring professionals is expensive, try hiring amateurs” – Red Adair

In today’s ultra-competitive and globalised marketplace, businesses are under increasing pressure to hire people who are motivated to reach the organisation’s objectives. But given the fast-moving pace of the business world, with many businesses these days being exceptionally time-poor, time spent on hiring can be sacrificed with the pursuit of big-picture organisational objectives taking precedence. Whilst managers may feel this is an unfortunate yet realistic byproduct of effective prioritising, the true costs of making a bad hire will often cause management to reevaluate their approach to hiring.

A recent survey from the Australian, quoted in Business Review Australia, indicated that a bad hire can cost a company up to two and half times the salary of the employee in question. That means, an employee on a salary of $100,000 who turns out to be a bad hire, can lead to a potential monetary loss of $250,000 to the company. Much research has been conducted on the costs of a bad hire, and whilst they will ultimately vary from business to business, a study by the U.S. Department of Labour indicates that a bad hire costs a minimum of 30% of the employee’s salary, which has largely been used as the minimum financial cost threshold.

So where do these monetary losses arise from?

Salary payments: Ultimately, despite being a bad hire and unless exceptional circumstances arise, you will still have to pay your bad hire a salary for the time spent with the business. Often, due to not performing as expected, these salary costs can be extremely displaced from the job or employee output.

Education & Training: Training costs are one of the greatest expenses a business can endure, due to being extremely time and labour intensive. Training an employee who will not create a return on training investment is severe monetary threat for businesses.

Productivity: A bad hire, and the resources expended attempting to compensate for a bad hire, will ultimately lead to lower productivity or work output. Inefficiency has quantifiable costs for a business, which will ultimately entail a monetary value.

Loss of Revenue: Similar to the monetary losses experienced through lower productivity, however, loss of revenue from a bad hire can arise from multiple sources. These include, but are not limited to, lower job performance, poorer relationships with clients and reduced operational capabilities.

Costs to Re-Hire: The costs of recruitment are high, with direct costs associated with advertising open positions, the costs of having an open-position, administrative costs and the time and money spent evaluating and interviewing potential employees.

Potential Legal Costs: In many circumstances, businesses have to outsource legal work when terminating the contract of their bad hire. As we all know, legal costs are exceptionally high and the act of firing an employee can directly cost a business thousands of dollars.

However, the monetary or financial losses experienced from a bad-hire are not the sole cost to a business. In a study by Robert Half, Human Resources managers in Australia expressed the following as the single greatest impact of a bad hiring decision.

Lost productivity 55%
Lower staff morale 23%
Monetary cost 19%
Don’t know 3%

The reality is, a bad hire can have extremely detrimental effects to the culture of an organisation, which may in turn lead to monetary losses that are, however, extremely hard to accurately calculate. These more ‘qualitative’ costs can cause greater damage to a business than the monetary losses experienced, with the potential to snowball into much larger issues if not addressed promptly and precisely. So what are the ‘qualitative’ costs of a bad hire?

Lower Staff Morale: Of all the likely effects of a bad hire, human resources managers in Australian noted lower staff morale as having the greatest impact. The reality is, a bad hire is likely to have an extensively negative effect on the culture of a business. Whilst a poor culture is almost impossible to place a monetary cost on, there can be no positive monetary benefits from poor culture.

Burn-out: Often in instances of a bad hire, other employees are left to make up for the poor performance of the bad hire. This can place overwhelming pressures on employees, leading to employee burn-out and job dissatisfaction.

Client Relations: Whether affected directly by your bad hire, or through the added pressures faced by your ongoing employees, bad hires often cause a strain on client relationships. This has the potential for your business to lose major accounts, or have your clients second-guessing whether your values align.

Reputation: This is extremely prevalent if your bad hire was in a managerial position; what views will now be held about your business?

So how can a business avoid making a bad hire? Luckily, there are a range of options. From interim management recruitment, to extensive psychometric testing in order to ensure employee alignment, Options Consulting Group provides a range of comprehensive solutions for all of your recruitment needs. Contact us today on 03 9693 9300.