How Much Does a Bad Hire Cost?

by Kristen Long on April 26, 2016



As business leaders, we all calculate our cost of doing business differently. Many executives consider the cost of hiring employees to be a part of this formula. While no one is 100% perfect at hiring, if employee turnover happens enough, it will leave you asking the inevitable question: How much does a bad hire cost?

Let’s break it down.

The Cost of Recruitment Software and Services

Business leaders should consider the many elements involved in the recruitment process. Employer branding/marketing, job advertising/resume database access, professional networking, a dedicated recruiter and an Applicant Tracking System are just a few of the resources many companies may use on a daily basis.

Sure, you might be able to make the hire without one or two of these resources depending on how large your organization is and how frequently you are hiring. But, any growing business will be investing in at least some of these resources in order to source top talent.

So what kind of costs are we looking at here? Depending on the size of your organization and the contracts that are negotiated, these prices may vary. On average we estimate for a single online ad, you are looking at $400+ depending on the job board, with another $400+ for resume database search capabilities. For one advanced recruiting license on LinkedIn, add on another $600+ per month, as well as $100+ per month/per recruiter if you are subscribing to candidate tracking software from an ATS provider. That is at least $1,500 before you even start looking at how much it’s costing you to maintain employer branding and marketing initiatives.

The Cost of Employee Administration

In a perfect world, these recruiting costs should actually help you find the best suited candidate. Next, we look at the costs of actually making them an employee. Background screening services, drug testing, and credit testing may all be variables of cost in your work environment. Background screening costs vary depending on your industry and position you’re hiring for, but usually will be at least $100.

We also need to take into consideration the cost of the human resources department. The big investment here is the time your existing team spends on your new hire. Your HR rep will need to file appropriate paperwork and manage tedious amounts of federal and state compliance. Many people are involved in securing a successful new hire.

Your department managers or dedicated training coaches will spend hours of their time bringing your new employee up to speed. The Association for Talent Development reports that the average cost per employee for on-the-job training and development is over $1,200. But with this said, when it comes to high level IT employees, getting them up to speed can take weeks to a month. If the average IT professional makes $100,000 per year that’s $8,333 of money invested. This doesn’t take into account the other team members’ time spent in training. So how much does a bad hire cost? Can we really calculate all these costs?

The Cost of Benefits and Taxes

When considering how much a bad hire actually costs you, the loss of compensation is an obvious part of the formula. But there’s an unfortunate amount of monetary loss on top of that which is frequently forgotten in the calculation. Don’t forget any sign on bonuses you’ve included and you can’t forget the cost of benefits. The US Bureau of Labor Statistics estimates that for professional workers, benefits cost an average of $17.40 per hour.

Furthermore, there are statutory costs that can really hike up the expense. Consider the fact that for W2 employees, you need to pay federal, state, Social Security, Medicare, and unemployment insurance. You can’t forget the cost associated around workman’s compensation and other forms of corporate insurance that protects the organization for malpractice.

All these hidden costs can add up quickly. Going by the federal average and estimated insurance costs, based on a $100,000 employee, you’d be looking at almost $4,800 in costs if that employee quit after a month.

The Incalculable Costs of Intangible Factors

So far, this is totaling thousands of dollars wasted on a single bad hire. But there are several intangible elements that are just as costly. For instance, it’s likely that the bad hire had a direct effect on the quality of service or product, which could result in the major loss of customer loyalty.

Internally, there will be lost productivity as the team will be understaffed and struggling to make up the work. That’s not to mention the decreased sense of employee morale which will even further affect performance. From lost customers to lost productivity, you can easily imagine that this might be thousands of dollars down the drain.

So How Much Does a Bad Hire Cost You?

Let’s say your new $100K Java Developer quits after a month. When everything is all said and done and the termination is officially on paper, you’re looking at a direct waste of almost $20,000. And that’s not including those intangibles we mentioned, which could be thousands and thousands more. Is that something a growing business can afford? Especially if you end up with a handful of bad hires in the space of just a few months?

At Resource 1, we hate to watch companies incur these kind of expenses. That’s why we work closely with our clients to prevent bad hires, helping them save both time and money. Tell us more about your hiring needs, and we’ll ensure you find the perfect fit.