Anyone tasked with making hiring decisions for a company knows that it’s a tedious and often difficult process. Whenever a bad decision is made in the hiring process, it’s not only a challenge and time-consuming issue, but it quickly becomes an expensive mistake.
Knowing that one decision can cost the company a lot of money only adds pressure to the process. But how much does a bad hire actually cost? In a 2014 study by Robert Half International, 34% of CFOs agreed that bad hires cost them productivity, and managers spend 17% of their time (almost 1 day per week) supervising poorly performing employees. And the U.S. Department of Labor says that the cost of a bad hire can reach up to 30% of the employee’s first-year earnings. But how much is a bad hire really costing your company?
A company can easily calculate some costs, like customer acquisition. But some metrics are a lot harder to figure out, like how much money is being lost when the growth team is disengaged all day. Human behavior just doesn’t come with a number attached to it like monthly recurring revenue or cart conversions. Adding to the complication, the cost of a bad hire will vary from business to business. Here are four simple formulas that can be used to determine how much a bad hire will cost any business.
How Much Time Do You Spend on Hiring?
Hours, days, weeks, and sometimes months can be spent trying to find the right candidates, interviewing them, and onboarding and training new hires. A business simply can’t afford to spend all that time and resources, simply to fire them a few months later.
To determine exactly how much you are losing due to the amount of time spent, start by identifying all employees who are involved in the hiring process. It could be a department manager, HR team members, or the CEO. Then calculate how many hours per week each person spends on hiring-related tasks. If an HR manager spends 30 hours each week on recruitment and hiring activities, take that number and multiply the HR manager’s hourly rate to measure how much those hires are costing.
30 hours per week x $20 per hour = $600 per week
Knowing that your HR manager is spending a significant amount of time hiring and recruiting, it might be time to think about different ways to speed up the hiring process and reduce workload. Tools like applicant tracking systems (ATS) enable the electronic handling of recruitment needs. They can be implemented or accessed online and can be customized depending on the needs of a company.
How Much Revenue Are You Making with Each Employee?
When a great hire occurs, money is being saved in onboarding and retention costs. Plus, a high-performing employee is great for the bottom line. But how does that break down into hard numbers? It starts by finding the revenue per employee.
This metric can be found in a company’s year-end financial report (or SEC report for a publicly traded company). Multiply that number by 40% for an estimate of the profit margin per hire. Say the revenue per employee is $200,000, then the profit margin per hire is about $80,000 per year. But an employee in the top 25% of the talent pool tends to bring in at least an additional 25% in profit. So, in this example, an average hire brings in $80,000 in profit, but an above-average hire brings in at least $130,000. A bad hire could result in a $50,000 loss in profit.
The Cost of Attracting Employees
Recruiting is essential for growing businesses, and it costs money. It’s essential to figure out how much is spent on recruiting in order to determine if it’s effective.
If an average of $300 per month is spent advertising each available position, and there are 10 open positions, that is $3,000 spent on job ads alone.
The formula is simple: A (advertising) x OP (open positions) = cost.
Seeing this number might cause you to consider ways to cut down on the cost. This is another place where an ATS would be beneficial. If you lean into a pool of applicants for similar positions that is stored and prescreened in an ATS, you can cut costs on recruiting.
Turnover Costs
A bad hire not only has a direct impact on the business, but he or she indirectly impacts employee engagement and productivity throughout the company. Measuring this is very difficult. The best way is to start with turnover rates.
- Number of regrettable departures (ND) = the number of employees multiplied by the annual turnover percentage
- The average cost of those departures (C) = the cost of hiring, plus the cost of onboarding and training, plus the cost of learning and development, plus the cost of time with the role unfilled
Multiply ND by C to find the annual cost of turnover.
Here’s an example of a 100-person company with a 10% annual turnover rate:
If $20,000 is spent per person on hiring, $10,000 per person onboarding, learning, and development. In addition, there is approximately $40,000 in lost productivity due to time spent filling the role. This would make the annual cost of turnover $700,000.
The impacts of a bad hire will affect every business differently, but one thing is certain: a bad hire is costly. Not only can it hinder your company and make you question your ability to lead and grow your business, but it can impact your high-performing employees. While investing in new technology for your company, such as an ATS system, you will save time, resources, and money in the long run.
Darren Bounds is the CEO and Founder of Breezy HR. As a passionate, design-minded technologist and serial entrepreneur, Bounds has over a decade’s experience building HR tech that puts people first. He is also the former VP of Technology at Taleo, the world’s largest provider of HR software solutions. Bounds believes great design can save the world and that HR should be human. When he’s not building products or businesses, you can catch him playing Overwatch.