A Deep Dive into The Cost of a Bad Hire

Have you ever made a bad hiring decision? Chances are, if you’re a leader, you have, and you know it’s a costly mistake. But just how costly was that bad hire? Hiring the right talent is crucial to your company’s success. With the right talent on board, you will reduce employee burnout, reduce risk, decrease hiring costs, maximize productivity, and promote company growth among other benefits. On the other hand, a bad hiring decision comes with a significant price tag.

We’ve taken a deep dive into the numbers and developed a formula that might help you.

Here is a visual of the formula:

The Cost of a Bad Hire Formula = Cost Per Hire + Onboarding Cost + Compensation and Benefits + Productivity Lost + Miscellaneous Cost

To fully understand the financial impact of a bad hiring decision, it is essential to break down the associated costs for you.

1.     Cost Per Hire: This covers both internal and external expenses related to the recruitment process. For example, internal costs might include HR time and resources while external costs cover job advertisements and marketing efforts.

2.     Onboarding Cost: These are all the costs associated with training and integrating a new employee into your company.

3.     Compensation and Benefits: This is the total amount spent on an employee's salary and benefits.

4.     Productivity Lost: The revenue lost due to the loss of productivity because of the bad hire.

5.     Miscellaneous Cost: Additional cost associated with the bad hire.

Now let’s bring this concept to life with an example. You’ve hired an accountant at your manufacturing plant, and he performed poorly for 6 months. The impact of your bad hiring decision will be significant. But how significant is it?

1.    Cost Per Hire Formula

How to Calculate it:

Cost Per Hire = (Internal + External) / # of Hires

Example:

·      Internal Cost: $10,000 (HR Time and Resources)

·      External Cost: $2,000 (Job Advertisement and Marketing)

·      # of Hires: 1

Calculation:

Cost Per Hire = ($10,000 + $2,000) / 1 = $12,000

2.    Onboarding Cost Formula

How to Calculate it:

Onboarding Cost = Total Training Cost / # of Employees Trained

Example:

·      Total Training Cost: $7,000

·      # of Employees Trained: 1

Calculation:

Onboarding Cost = $7,000 / 1 = $7,000

3.    Compensation and Benefits Formula

How to Calculate it:

Compensation and Benefits = Salary + Benefits

Example:

·      Salary: $50,000

·      Benefits: $15,000

Calculation:

Compensation and Benefits = $50,000 + $15,000 = $65,000

4.    Productivity Lost Formula

For the purpose of acknowledging and identifying a value for productivity, we have used a general calculation of revenue per employee. We recognize this may not be completely applicable in all situations and we encourage you to substitute a more pertinent calculation if you in fact have one. The point here is to recognize there is a definite productivity implication in calculating the overall cost.

Step–by–Step Calculation:

a.     Calculate Average Revenue per Employee:

Average Revenue per Employee = Total Company Revenue / # of Employees

Example:

·      Total Company Revenue: $10,000,000

·      # of Employees: 100

Calculation:

Average Revenue Per Employee = $10,000,000 / 100 = $100,000

b.    Estimate Bad Hire’s Revenue

Bad Hire Revenue = Average Revenue per Employee * Percent Productivity

Example:

·      Average Revenue per Employee: $100,000

·      Percent Productivity: 50% (0.50)

Calculation:

Bad Hire Revenue = $100,000 * 0.50 = $50,000

c.     Determine Productivity Lost

Productivity Lost = Average Revenue per Employee – Bad Hire Revenue

Example:

·      Average Revenue per Employee: $100,000

·      Bad Hire Revenue: $50,000

Calculation:

Productivity Lost = $100,000 - $50,000 = $50,000

5.    Miscellaneous Costs Formula

How to Calculate it:

Miscellaneous Cost = Cmanager + Clegal + Cother

Example:

·      Cmanager (Managers’ Time): 30 hours * $50/hour = $1,500

·      Clegal (Legal Cost): $3,000

·      Cother (Other Cost; Damaged Equipment): $2,000

Calculation:

Miscellaneous Cost = $1,500 + $3,000 + $2,000 = $6,500

Summary:

Total Cost of a Bad Hire: Cost Per Hire + Onboarding Cost + Compensation and Benefits + Productivity Lost + Miscellaneous Cost

Total Cost of a Bad Hire: $12,000 + $7,000 + $65,000 + $50,000 + $6,500 = $140,500

“The Cost of a Bad Hire” is significantly impacting entire organizations. As detailed in the example a bad hire can cost upwards of $140,500. Investing in proper hiring and recruiting processes is crucial in avoiding a bad hiring situation.

If you’d like to learn more about how a bad hire is hurting your team and organization, contact Johnfallon@arrowheadtalentsolutions.com.