True Costs of a Mis-Hire

The cost of a mis-hire goes far beyond the operational inconvenience many perceive it to be. How so? Well, studies indicate that a “mis-hire” can cost companies three times the annual salary of the individual. Why does this happen?

  • According to Harvard Business Review, 80 percent of mis-hires are caused by bad hiring decisions and related flawed candidate acquisition and vetting processes
  • According to Gallup, a whopping 84% of new hires will “disappoint” their employers within their first year on the job
  • According to Fast Company, 38% of survey respondents believe that the bad hire resulted from urgency to fill the role, 34% attributed it to a poor cultural fit and 21% felt that a failure to test or investigate the employee’s skills was to blame

So, what are the true costs associated with hiring the wrong person?

1. Financial Costs (Direct)

  • The US Department of Labor currently estimates the minimum cost of a mis-hired employee to be $11,713 – a mere drop in the bucket compared to other, more realistic, estimates
  • The 2014 Fast Company survey alluded to earlier indicated that the direct cost of a mis-hire ranges from $25,000 to $50,000
  • According to an analysis sanctioned by The Economist, the direct cost of a mis-hired executive with a salary of at least $150,000 is a minimum of $62,500 and includes costs associated with hiring, onboarding, training and separation

2. Financial Costs (Indirect)

  • Indirect costs include internal impacts such as loss of productivity, lowered team morale, cost of work covered by other employee or contractors. Indirect costs also include hits to an organization’s reputation and loss of business opportunities.
  • A study conducted for Bradford Smart’s book, Topgrading: How Leading Companies Win by Hiring, Coaching and Keeping the Best People, concluded that mis-hired employees with an average salary of $114,000 would result in a total mis-hire cost of $2,709,000 or 24x the salary! How could this be? Smart’s study was all-inclusive and accounted for the cost of hiring, cost of benefits, severance pay, mistakes made by under-performers, missed business opportunities and internal disruptions leading to operational inefficiencies, lowered productivity and impaired teamwork.
  • According to Dr. Smart, the estimated cost of a bad hire ranges from 5 to 27 times the amount of the person’s actual salary – check out Topgrading’s Total Cost of Mis-Hire Calculator

When there is a significant mis-hire, not only will other employees question it but so too will clients. When clients begin to question the hiring practices of their vendor and said mis-hires begin to impact their own businesses, it may be time to look for a new vendor.

– Amy Rees Anderson, Managing Partner of REES Capital (A Mentor Capital and Angel Investment Firm)

3. The Domino Effect

As noted in the calculation of indirect costs, the impact of a mis-hire can be and usually is far reaching. Zappos CEO, Tony Hsieh, believes that one bad hire can have a domino effect resulting in further inferior hires and bad decisions.

  • In 2010, Hsieh noted that his own mis-hires had cost Zappos “well over $100 million” as a result of the extended impact associated with indirect costs.
  • There is also a significant, yet rarely mentioned, opportunity cost associated with missing out on the right hire. Not only will the company miss out on the value that he or she would have created, but it is very likely that the “right one” landed at a competitor – further exacerbating an already dire set of consequences.

Keep in mind the following four mistakes employers must avoid in order to make the right hiring decisions:

  • Using unqualified or unprepared talent evaluators – this is #1 with a bullet!
  • Failure to properly define role and ideal candidate profile in context of organization’s needs
  • Failure to assess candidates for cultural fit
  • Failure to properly and effectively onboard the new employee

Bottom line: People are a company’s greatest asset and by making sound recruitment decisions, business owners and executives will not only avoid the serious consequences of a mis-hire, but also drive productivity in the near term and strengthen the overall organization over the long run.