What’s the cost of a bad hire? It depends….
Why a bad hire can crush a small/medium size business?
While researching to find what is the actual cost to small companies when hiring the wrong person, I discovered many different answers with a multitude of reasons. So much so, that I decided to use a basic common sense approach and develop my own formula.
My goal was to keep it simple, yet take into account key factors that contribute to the cost of hiring within a 90 day time frame, assuming the hire leaves within a week after the 90 day term.
There are two components:
- Hard cost = salary of employee plus an estimated 25% for benefits and taxes.
For 90 days, a 50K salaried employee working would cost $15, 625.00. Training usually lasts two weeks and includes a number of people assisting. Depending on how much training of the two weeks will included others, a conservative estimate would be 40 hours of a 50K per year resource, which (with benefits) will cost $1, 201. Overhead would equal an estimated $3, 000 for the 90 days and recruiting costs are around $1, 000 (which is probably low). Total hard cost in this example is $20, 826.00 for just one bad hire lasting 90 days with your company.
- Intangibles = Opportunity Costs
Each company incurs opportunity costs in dealing with a bad hire. Different roles are higher or lower, such as a sales role is higher because the territory is not generating revenue. So when do Opportunity costs begin? At the start of the hiring process, during the lack of production of the 90 days, and then the timeframe to replace the bad hire.
Wow! With an average vacancy rate of 60 days, we’re now looking at 60 + 90 + 60 days of unproductive time for a company!
The impact is on operations/sales productivity, revenue, morale, and the customer because of deficient deployment of resources. Lastly, employment brand takes a hit which can negatively impact future hiring….ALL DUE TO A BAD HIRE.
How do we measure this? There is no hard computation, however many studies equate this to be 3-10X salary per month of vacancy. To make it simple and conservative, let’s use 3X the monthly cost of a 5K per month employee. With taxes, that equates to $46, 875 in 90 Days. Together, the cost of a bad hire for a $50, 000 per year employee leaving after 90 days is conservatively estimated to be $67, 701.
If you are lucky, a bad hire can be isolated with very little opportunity costs impacting the business. Therefore, simply calculate the hard cost of that person. However, this is rare with Small/Mid size companies when each individual is a higher percentage contributor to the team. Teamwork is essential and throwing one bad hire can set you back months, taking a lot of time and effort to reboot, and then potentially causing a downward spiral.
Now for the good news, you can be proactive and mitigate your risks to largely avoid these costs. It starts with planning properly the type of person (competencies, experiences, culture) you will be looking for and by when. Then building a process that is efficient in attracting, screening, assessing, interviewing and onboarding will ensure candidates have a positive and efficient experience.
Hiring doesn’t have to be that complex. Simple, straightforward, and effective processes will drive better outcomes with less risk to the business.
Contact us for more information or just to exchange new ideas.