The Cost of a Bad Hire

Many business leaders agree that a companys most valuable asset is its people, in fact, many incorporate this point in messages from the corner office. If youre lucky enough to have a team made up of enthusiastic, talented individuals who are great at what they do, chances are youll concur. These star players will keep you moving closer to your long term goals. It’s quite likely you can estimate the value they contribute to your company’s bottom line, especially as their contributions earn them quantifiable bonuses each year. But what are the implications for your not-so-great employees, or even those you would have to admit were simply poor hiring decisions? Are you able and willing to determine just how much a bad hire could cost you?
Unfortunately, estimated costs range from three times base salary (as suggested by 42% of respondents in a 2007 Right Management survey) right up to in excess of 24 times base salary – a figure suggested by Bradford D. Smart, PhD,  in his book, Topgrading: How Leading Companies Win by Hiring, Coaching and Keeping the Best People.  As you would expect, the level of these costs are directly correlated with the seniority of the hire. So, if youre recruiting for a high-level role and you get it wrong, it could substantially damage your business.
There are various resources available online where you can calculate the tangible costs of a bad hire, such as this one by HR World. Generally speaking, you need to take into account the cost of recruitment advertising, interview time, training investment and relocation costs. Or if you’re comfortable with Right Management’s or Dr. Bradford’s analysis, simply choose a multiple of base salary within the 3-24X range noted above. Do you have a number? Great, now you have a starting point to understanding of the negative impact of a bad hire. However, youre not done analyzing the situation. What about the critical intangibles that are more difficult to quantify?
A bad hire causes stress and inconvenience. As a CEO or executive, the responsibility of a bad hiring decision will weigh on your mind. Youll spend precious time worrying about how to manage the person out of the business – time that would otherwise be spent planning to drive the business forward to achieve your long-term goals.
A bad hire could result in missed opportunities. This is especially true if the bad hire is in a client-facing role. Such a bad hire could also result in damage to an existing long-term relationship, which would involve significant time investment to repair.
A bad hire could negatively impact company morale. This can be particularly significant if the bad hire is responsible for a team. Faced with a bad hire’s poor management style, your team’s productivity and energy levels may drop. If there are personality clashes you may even lose a steady performer or – worse still – a star player.
A bad hire directly affects you. Your reputation as a decision maker may be questioned. Of course, no one is infallible. But theres no getting away from the fact that, as a business leader, people expect you to get it right the majority of the time, especially for the high-profile decisions.
So, how can you increase your chances you do get it right? If you decide to work with an executive search firm, source a provider you can work comfortably with. You need to be confident that they understand your business objectives and culture, and the sort of person who would be a good fit. Invest the time necessary to make sure that all of their questions are answered. It will be time well spent. (see How to Work Effectively with an Executive Search Firm ).

But thats not to suggest that an executive search firm is the exclusive solution. With or without a search firm, use your contacts and networks to source potential candidates. Utilize the internet and professional networking sites to research them – you may even be able to get in touch with their past employer or a colleague who can offer valuable insights. Psychometric evaluations can also help you gain an insight into a potential hires character, work ethic, management style and personality (see Strengths Finder ).
No matter how good your powers of perception and interview skills are, be sure that you draft a well structured and thoughtful interview process, as the process will make you thoroughly analyze what you need from the hire. If you do work with an executive search firm, a good one will provide consultative advice to ensure you cover all salient points and get the most out of your interview time.
A good hire is worth their weight in gold. A bad hire can negatively impact your bottom line and create serious difficulties and distractions. Statistically, almost half of all recruitment decisions result in a bad hire – dont be one of the 50% who make a costly mistake.



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