At Talent Solvers, we run into hiring managers who would do anything to avoid working with a recruiting firm. Often, this includes settling for “good enough” talent or waiting months on end with open positions, hoping the right candidate will appear. While partnering with a recruiting firm may sound like an additional expense, the ultimate costs associated with vacancies or selecting the wrong talent extends far beyond any recruiting fee.
“The cost of a bad hire is always extensive. Most companies don’t know the full cost of the turnover, so they don’t apply the resources upfront to avoid it. If you make a bad hire, there is a ripple effect among all who work for you, your product and your product quality.”
Arte Nathan, founder of The Arte of Motivation
A quick google search for the “cost of a bad hire” delivers a slew of staggering statistics ranging from an average of $15,000 to more than five times the new hire’s salary! This varies based on the position but an extensively researched report from the Center for American Progress found that companies, “typically pay about one-fifth of an employee’s salary to replace that employee,” with senior or executive level positions having, “disproportionately high turnover costs as a percentage of salary (up to 213 percent!)”
With so much at stake, we wanted to help hiring managers:
- Understand the minimum cost of a bad hire for their organization.
- Be cognizant of the impact of direct, indirect and additional risk costs.
- Make the case for partnering with a recruiting firm when the benefits outweigh the cost.
Calculating the Cost of a Bad Hire: What to Consider?
There are several variables to consider when calculating the overall cost of a bad hire in the form of direct costs, indirect costs and additional risks.
Direct Costs:Tangible and easily measurable. These include the literal cost of hiring for the position including time spent on sourcing, hiring, training and onboarding. Positions that are open for longer periods of time have greater direct costs.
Indirect Costs: The impact of individual and company-wide productivity from the bad hire (e.g. a salesperson who should’ve been delivering $50K in revenue but only brought in $10K). This includes the impact on other departments, such as an engineer not being able to fix a bug that impacted sales and customer success.
Additional Risks: More difficult to measure but incredibly important to be aware of. A bad hire can negatively impact company morale, weaken your brand, impact your ability to scale and gain market share or even result in litigation fees.
“If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.”
Red Adair
We’ll focus on high-level direct and indirect costs as they’re easy to measure but encourage teams to leverage employee engagement surveys and other channels to track the full cost for your company.
Using the Calculator: What’s included in the result?
Our calculator will find the estimated cost of a bad hire by breaking down:
- The hourly rate of the hiring manager multiplied by the time spent sourcing, screening, interviewing and onboarding for the role.
- The hourly rate of the employee multiplied by the time spent onboarding, training and ramping up for the role.
- The average cost of advertising for the position.
- The estimated cost of lost productivity.
Summing the above delivers what it costs your organization to make a bad hire. Along with this, we suggest you measure:
The cost of a vacancy:
What does it cost to have an open role? Are issues going unresolved? Is it holding back your ability to scale? Looking at other indirect costs and additional risks, generate an estimated cost of a vacancy per role to track how vacancies impact the bottom line.
The cost of turnover on morale:
Don’t overlook the cost of employee turnover on company morale. Teammates will often take on additional workloads to help cover a vacancy, impacting engagement and productivity. Meanwhile, hiring goals suffer which have a ripple effect on team morale. Employee engagement surveys help to reveal these hidden metrics that play a significant role in the cost of a bad hire.
How to Avoid Making a Bad Hire: Now What?
“One subpar employee can throw an entire department into disarray. Team members end up investing their own time into training someone who has no future with the company.”
Ryan Holmes, CEO of HootSuite
The cost of turnover extends well beyond salary with negative business impacts and lost productivity connected to each and every hiring failure. Thankfully, teams have a choice in who they decide to bring on board. Not every hire will be perfect every time, but companies should make a conscious effort to invest in hiring the highest quality talent, the first time.
According to the Harvard Business Review, as much as 80% of employee turnover is due to bad hiring decisions! If we have the ability to control these crucial decisions and know the consequences of a bad hire, what’s holding us back from investing more in the hiring process?
Having a holistic understanding of the cost associated with a poor hire often changes the conversation from, “how can we avoid paying a recruiting fee?” to “what’s the fastest route to hiring high-quality talent?” And, if you’re looking for an answer to that question, we hope you reach out to us.