The Costs of a Bad Hire

Have you ever gone to a restaurant and your expectations from the menu weren’t met? It sounded scrumptious, but when it was delivered it didn’t live up to the hype.

Of course, a bad meal will set you back about $25, but a hiring the wrong candidate can bring significant financial loss. The consensus in the reviewing community is that the vast majority of corporations have yet to truly grasp the costs incurred when a bad hiring decision is made. When we say “costs” here, we’re addressing both hard dollars and “soft” dollars (morale, production, and more) that an organization incurs.

Hard Dollar Costs
Dr. John Schinnerer, President of InfiNET Assessment, a professional screening and testing company, says there are typically four types of hard dollar costs a company can incur with each unsuccessful hire:

1. Irretrievable expenses associated with the hire’s recruiting effort

2. Processing costs, which include integrating the person into a company as well as training and orientation

3. Compensation costs the company has paid the employee until he or she leaves

4. Severance and benefits the employee might have been granted (obviously, Dr. Schinnerer says, we all know that many companies have been quite happy to pay bad hires severance in order to avoid legal disputes and cut their losses)

These hard dollar costs can be significant. But what about the soft dollar costs of a bad hire?

Soft Dollar Costs
To assess the soft dollar costs of a bad hire, companies should first consider the opportunity costs that the company has incurred as a result of the hire.

Basically, when you’ve given your hire an objective to achieve in the first quarter and the objective is not achieved, you must consider the costs of those unachieved and forgone opportunities. Did the departing employee drop the ball on a multi-million dollar sale? Did they drive away “pillar” employees? The answers to these and other questions will clearly outline the potential soft dollars that the bad hire may have cost the company.

Other common soft dollar costs resulting form a failed hire involve workforce morale and workloads. Ask yourself: What were the effects of the failed employee’s arrival and departure on morale and the increased workload on the company’s other employee teams as a result of that person’s ineffectiveness and eventual absence?

Bad Hire Costs: Blue Collar and White Collar
Hard costs related to bad hires range from 50% to 200% of salary depending on the classification of the employee. The bad hire costs for blue and white collar workers do in fact differ. The equation that consultants use to calculate the hard dollar costs of bad hires for blue collar versus white collar workers are as follows:

Blue Collar: (1.5 to 1.7 X annual salary) + benefits burden + owed commissions/stipends/bonuses

White Collar: (2.0 to 2.2 X annual salary) + benefits burden + owed commissions/stipends/bonuses

Human resource professionals can expect that for blue collar workers the cost of a bad hire is from 1.5 to 1.7 times the annual salary, plus the burden of benefits (the burden of benefits is roughly $7,500 to $11,000 a year per employee). However, for management or white-collar workers, the cost of a bad hire is between 2.0 to 2.2 times salary plus benefits, which includes severance payouts.

According to Dr. John Schinnerer, “In this difficult economy where employers are seeing hundreds of desperate resumes for a single job opportunity, many candidates are tempted to ‘oversell’ their qualifications in the hopes of obtaining jobs. So it really is more important than ever for corporations to attempt to empirically predict as much as is currently possible which potential employees will perform effectively and honestly, and stay with the company for the long haul.”

*excerpts from er Daily Forum

For more information on how Alpern Rosenthal can assist you with finding the right employee the first time to avoid bad hiring costs, contact Cheryl A. Jones, Manager of Corporate Placement Services for Alpern Rosenthal. She can be reached at 412.281.7692, ext. 319 or at caj@alpern.com.

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