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Breaking Down
the Financial Costs
of a Bad Hire

by Mauricio Ventura, Managing Director

November 10, 2023


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Financial Costs of a Bad Hire

In this article, we're going to discuss an often-underestimated aspect of business management: the financial costs of a bad hire. Conventional wisdom tells us that a robust hiring process is the backbone of a thriving company, but even with meticulous screening, the occasional poor fit is inevitable. When this happens, it’s not just about a mismatch of skills or personality; it’s about the tangible monetary losses that can strain the company's financial resources. We're going to present here actual numbers, breaking down the different phases where money is spent — and often lost — when a hiring decision goes wrong.

Initial Hiring Costs

The journey of hiring starts with attracting candidates, and this phase alone can be surprisingly costly. Advertising job vacancies through online job boards, industry-specific publications, and targeted social media campaigns can rack up a substantial bill, especially for in-demand roles or specialized positions. As Forbes notes, a new hire can cost over $4,000 before wages and salary from advertising costs alone.

Interviewing and Assessment Costs

The next financial outlay comes in the form of interviewing and assessing candidates. Each interview involves the hourly wages of interviewers, which can accumulate quickly when multiple team members are pulled from their regular duties. Sophisticated assessment tools and tests also add to the cost, with CareerBuilder research indicating the average financial cost of a bad hire at $17,000, which can rise dramatically depending on the role and company.

Onboarding and Training Costs

Once a candidate is selected, the cost of onboarding an employee, as stated by Jörgen Sundberg via Forbes, can be as high as $240,000. These programs are not only a direct cost due to materials and potential external trainers but also an indirect cost considering the time senior staff spend away from their usual tasks to facilitate training.

Salary and Benefits Paid Out

Naturally, the most obvious expense associated with any new hire is their salary and benefits. The U.S. Department of Labor estimates that the financial cost of a bad hire is an estimated 30% of the employee’s first-year earning potential, which are sunk costs if the hire is not meeting expectations.

Lost Productivity Costs

The cost of lost productivity, as GoodTime.io reveals, is very real, with hiring the wrong candidate potentially costing up to $240,000. This is due to non-productive work time and the additional wage payouts required when other employees work overtime to cover tasks or correct errors.

Disruption Costs

The financial costs of a bad hire resonate beyond just their immediate tasks. There's a measurable impact on project timelines and team efficiency, which can be reduced as colleagues may need to compensate for the bad hire’s shortcomings.

Termination Expenses

When the decision is finally made to terminate a bad hire, the costs don't stop there. Severance pay and the risk of increased rates for unemployment insurance claims are financial burdens that have to be addressed.

Replacement Costs

The cycle then begins anew, with the organization facing a repeat of all initial hiring costs. The process of advertising, interviewing, onboarding, and training must be re-initiated to find a replacement.

Conclusion

To conclude, the journey of a bad hire is fraught with financial pitfalls, from the initial advertisement to the eventual replacement. It's a stark reminder of why investing in a meticulous hiring process can save money in the long run. Getting it right the first time prevents the domino effect of costs that a bad hire precipitates. It’s not just about filling a position; it’s about investing in the financial health and future of your company.

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