What’s the True Cost of a Bad Hire?

The financial impact of a bad hire is just the tip of the iceberg. Learn how one bad hire can poison productivity, engagement, and more.

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No matter what industry you’re in, hiring mistakes cost a lot of money—about 20% of an employee’s salary, or $6,000-$15,000 for an average worker. For specialized or senior employees, replacement costs can be astronomically higher.

But anyone who has ever dismissed a bad hire knows the financial cost is just the tip of the iceberg. The true danger lies just beneath the surface, influencing important metrics like employee productivity, efficiency, and engagement.

What Does a Bad Hire Really Cost?

The most toxic effects of a bad hire aren’t all on your company’s pocketbook. One bad hire can:

  • Lower morale and productivity. When you have the wrong person in any given role, people notice. Left unaddressed, workers often begin to question leadership’s ability to judge who is right and wrong for the team, causing dissatisfaction in all areas of their work.
  • Hurt objectives. Sometimes, taking on a terminated bad hire’s work means doing work that’s beyond one’s immediate area of expertise. In these cases, the damage done by a bad hire extends beyond an overburdened employee’s late nights at the office and directly dings business goals.
  • Cause more employee departures. Low morale isn’t your only problem with a bad hire. Like dominoes, one off-kilter employee can cause even your best workers to actively seek employment elsewhere.
  • Create more work for teams. Departing employees, bad or good, take with them company knowledge, including knowledge of successful and failed projects. Needing to fire and rehire for a role means you’ll need to set aside time for your next hire to get acquainted with your team’s history, which takes time.

As though the cost of an underperforming individual contributor weren’t high enough, the damage done by a poor leadership hire can be stratospheric. Bad managers come with even more far-reaching consequences than one bad hire and can:

  • Disempower entire departments, instead of just causing low morale
  • Fail to determine and help their team achieve goals, instead of just indirectly hurting goals through lack of knowledge as an individual contributor
  • Cause teams to crumble, instead of causing one-off employee departures
  • Create gaps in knowledge for teams with the loss of strategic experience

Half of all employees have left a company to get away from an ineffective or disagreeable manager at some point in their career. While some of those departures may stem from personal disagreements, Gallup’s State of Management Report found that more often than not, leaders simply hired the wrong person—only 10% of people have “natural” management talent (it must be developed deliberately), and organizations fail to choose the right talent for manager roles 82% of the time.

Bad managers don’t just cause stress for current employees, either. Argues Tony Hsieh, CEO of Zappos, bad managers compound bad hire problems by making bad hiring decisions themselves.

Organizations fail to choose the right talent for manager roles 82% of the time.

Says Hsieh, “I would say the biggest category of mistakes that I’ve made, and we’ve made at Zappos, has been in hiring… If you add up the cost of all our bad hires and the bad decisions they made—they also hired people, and so forth—over 11 years it has cost the company well over $100 million.”

Related blog post: How much do hiring and onboarding cost?

How to Avoid the Consequences of a Bad Hire

Three things can help you avoid bad hires: improving interviews, keeping a pulse on your team, and getting honest about gaps in your HR strategy.

#1 – Interview Vigorously

Make sure that you’re truly able to determine both functional ability and culture fit before your new hire signs on the dotted line.

On the functional end, simulate a high stress project with task tests instead of relying exclusively on past work samples. On the personal end, mix formal and casual interviews and train all interviewers, senior and junior, to ask more meaningful questions. Even if a candidate seems like a perfect fit on the outside, make a habit of checking references, performing tests, and scheduling late-stage interviews with your entire team, not just managers.

When filling a manager role, it’s especially important to know what you’re looking for and make an extra effort to get to know their leadership ability. If possible, speak with their former direct reports (not just former bosses or peers). Remember that being a great manager vs. great individual contributor requires a radically different skill set.

#2 – Check in Early and Often

Sometimes, even with the right processes in place, you can still hire the wrong candidate. When this happens, you must address problems quickly.

Cameron Herold, former COO of 1-800-GOT-JUNK?, offers a useful framework for understanding when it’s time to terminate a bad hire: Pinpoint the exact problem you’re having with the employee (motivated and inexperienced? unmotivated but experienced? difficult personality?) and, after trying to improve the situation, don’t hesitate to let people go. In the end, it’s likely that they know they’re a bad fit, too, and their departure is better for everyone.

#3 – Get Your HR in Order

Hiring the wrong people can signal that there are bigger problems with your workforce.

As you overhaul your interview processes, take stock of your broader HR strategies around culture and engagement, too. Disengaged workers, for example, don’t suddenly become vibrant and engaged employees in interviews—instead, they can make for resentful interviewers who aren’t invested in getting the best people in the door. For the rest of your team, if you haven’t codified your company culture, values, and vision, it’s impossible to agree upon which qualities ideal candidates should possess.

See how Zenefits’ all-in-one HR platform can help your business run.

This article was originally published on January 29, 2016, but has been updated as of April, 18th, 2017.

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