November 27, 2014

Talk About Bad Company: The True Cost of a Bad Hire

cost of a bad hire

Hiring the wrong person for a position is an expensive mistake for a company to make. In a recent Career Builder survey 42% of companies reported that a bad hire cost them at least $25,000 in the past year, and 25% reported a loss of at least $50,000.

But for small companies, where every employee often juggles many important responsibilities, the cost of a bad hire can be even more devastating – up to $190,000 according to a report by Association of Certified Fraud Examiners.

The Cost of a Bad Hire

Besides of the direct costs like salary and benefits, ill-fitting employees also rack up indirect costs in lost productivity and the eventual need to recruit and hire a replacement employee.

These employees also require more supervision; CFOs reported that supervisors waste 17% of their time managing under-performing employees. That’s almost a day a week.

Additionally, 95% of those polled reported that a bad hire negatively affects workplace morale. In small companies, a bad employee can easily poison the working environment for everyone.

To avoid hiring the wrong person, there are several crucial steps you should take before you commit to hiring.

Keep Your References Close

In the aforementioned Career Builder survey, 21% of companies admitted that they hired poorly because they didn’t take the time to properly test and research the employee’s skills.

While almost all companies interview before hiring, potential employees tend to inflate their abilities and present their most polished selves during these sessions, so they are not the best indicator of what an employee will actually bring to your company. Resumes, which job seekers structure and write themselves, tend to be even less indicative of future performance.

David Goldberg, CEO at SurveyMonkey advises:

“Let resumes and interviews be used to reject candidates but rely on real references to hire people.”

References can give you real insight into your job applicants. While some former bosses will be reluctant to give extensive information for fear of being sued, they will usually be willing to at least tell you the person’s employment dates, rates of pay, and work habits (including their ability to work with others). You can also check the validity of the skills and experience the potential employee claimed to have during the interview.

The most important question to ask former employers is, “Would you rehire this person if the opportunity arose?” If the answer is no, then it might be time to pass on this candidate.

Be Proactive

Don’t just wait for the perfect employee to come to you – go out and look for them.

Figure out where your top candidates are likely to be spending their time, whether that’s a certain conference, trade show, or even a niche interest group and spend your time there too. Allyson Downey, the CEO of weeSpring, also advises companies to keep a ready supply of potential employees always at hand:

“I keep a pool of names in a database of people I’ve met that I’d like to work with someday. We’ve found it 100x more reliable than a resume screen — it’s like Moneyball for hiring.”

But if you don’t know of the perfect employee already, there are still ways to attract the right talent. Make sure your listings are descriptive, clear, and include the position’s day-to-day tasks, salary, and any necessary skills the position might require. You also want job seekers to get a good sense of your company’s corporate culture, so that they know whether or not they’d be a good fit before applying.

For example, many small businesses require their employees to inhabit many shifting roles within the company, so it might be a good idea to emphasize the need for flexibility and adaptability.

Kick Those Tires

It’s almost impossible to know how an employee will work within your company until he or she is actually placed into that environment. That’s why it is often a good idea to hire a top candidate on a temporary basis before fully committing.

Put them in charge of a test project or let them work on an existing project in a reduced capacity. This will allow you to accurately assess the candidate’s skills, and see whether or not they work well with your team.

While many small businesses may feel like they need to fill a position quickly, it pays to take the time to fully vet applicants or seek out better talent. It’ll save you a lot of money and headache in the long run, and make your company a happier and more productive place to work.

Frustrated Photo via Shutterstock

10 Comments ▼

Curt Finch


Curt Finch Curt Finch is the CEO of Journyx. Founded in 1996, Journyx automates payroll, billing and cost accounting while easing management of employee time and expenses, and provides confidence that all resources are utilized correctly and completely.

10 Reactions

  1. While reading the post, I was going to suggest hiring a candidate on a trial basis. That way, it’s a win-win situation for the business and the candidate as they both get to test out if they’re a good fit for each other.

    I was shocked that the cost of a bad hire’s up to $190k.

    • That’s a good idea. However, I don’t think a lot of would-be employees will be thrilled with the thought that they will be on trial basis. Also, while this can work, there is always the danger of getting less productivity from them once the old habits set in.

      • I hear you, Aira. It is a chance to take on the part of the would-be employee, but it’s worth a try I think, especially when compared with old habits setting in on a non-existent trial.

  2. A-player candidates typically don’t engage in “try it before you buy it scenarios.”

  3. It is true that a wrong selection cost badly to any company, specially to new found ones. That is why prohibition period is important to check the actual skill of an employee. Basis on this period any fixed decision needs to be taken by management team reg. the career of any employee in any respective dept. But i feel that thorough interview is better option with further check on their background can somewhat help in knowing the importance of an employee in the market.

  4. The cost of a bad hire is indeed dramatic, and the article doesn’t even list all the downsides. There is also the opportunity cost of using more time for the recruiter, hiring manager, and interviewers to go back and start over to hire again for the same slot – probably using the same flawed hiring process that produced the bad hire in the first place. There is a risk that process also incorrectly rejected better candidates, who may now be lost to the hiring company after the rejection. Then lastly, there is disruption to the business or specific project from fits and starts as more that one person is brought up the learning curve and then shortly replaced with a new person, who also has to come up the learning curve.

    Fortunately, this is an area where some science and better data-driven decision processes can be applied to get better outcomes – hires that fit the job, the company culture, and who are likely to be high performers. My company, Chequed.com, provides a hosted predictive talent selection system that is centered around a benchmark for fit to a specific job and a benchmark for fit to the specific company’s work culture. The platform has steps to do initial screening assessments that examines the personality traits of candidates against those required for high performance in the job and good fit to company culture. For the smaller subset of candidates that score high on that assessment, the system can generate a behavioral interview guide, complete with anchors for scoring the responses consistently across multiple interviewers, which is also tied to the job benchmark. Then for the small subset of candidates that score well on the interview, the system can perform online reference checking. This kind of reference checking is much more effective than traditional methods, though. The system guides the reference through a short (less than 5 minutes to complete) online questionnaire which is also an assessment of the candidate, but this time regarding observed competencies. Those questions are also tied back to the benchmark for the job. References are put in a position to be more candid, since the company can elect to give them confidentiality and the candidate agrees to this process as part of the terms for entering this talent selection process. Reference completion rates exceed 84% and the vast majority complete in 24-48 hours, without HR staff labor to play phone tag.

    The Chequed platform also has a step dubbed “Attract,” which produces a list of relevant passive candidates, along with an assessment score indicating their readiness to be recruited, as a by-product of the reference checking process.

    So, you can put real science, focus on job-relevant behaviors and competencies, convenience for the candidate and references, and labor savings for the HR/recruiting staff into your talent selection process. We do post-hire validity studies to demonstrate that the candidates selected by this process do indeed turn out to be high performers on the job. We use those studies to then go back and tweak the benchmarks to make them more and more accurately predictive. You can learn more about this in white papers and video interviews with major talent acquisitions leaders at the Chequed.com website.

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