Updated: Jan 25
When a candidate turns out to be a bad hire:
It is no fun for the employee who is in the spotlight for the wrong reasons. After all, they don’t get up in the morning thinking “I want to do a bad job today, what should I do?”
It’s no picnic for the team either. They are working in a team that is a misaligned and one of their colleagues is slowing things down.
It is no fun for you, the hiring manager, having to figure out what to do and how to handle the situation. You know, that situation where you have to coach the employee, until you unfortunately have to fire them or they quit.
I know this sounds stressful and unfortunately it is.
How do you make sure you don’t have to experience this situation and incur bad hire costs?
First, realize bad hires tend to happen when a company is looking for anyone who can step in fast or they don’t know exactly what they need. Typically, the hiring team gets along well with a person in the interview. Meaning they must be good, right?
Second, think about the aftermath of hiring the wrong person and the cost associated. This will help to see the big picture and alleviate harsher stress on the company’s budget.
Third, build a hiring process that ensures the final candidate will contribute and make a difference.
That means the first step is to carve out time to build a hiring strategy. After all, time spent now will save tons of time later.
The second step is to understand/remember what the real cost of a “bad” hire is?
First things first, employee turnover costs vary. It differs depending on the industry and sector of the industry for your business.
To put it in numbers: we looked at many different human resources and management association reports that state the range is between 30% to 250% of the annual salary of an exiting employee. Of course entry level positions will differ from the positions that require specialized skills and executive/management positions.
For example, a salaried employee at $30,000 with benefits of approximately $6,000 will have a turnover cost of $9,800 whereas a salaried employee with benefits at around $190,000 total could have a turnover cost around $380,000 or more.
Why does it cost that much?
There are a number of factors, including money spent:
to attract the new employee
to review candidate resumes
to interview to fill the position (all the team members time with the process)
to do background checks
on any separation costs
additional recruitment costs for the next hire (going through this cycle again)
You may be thinking I don’t have any bad hires, but I do have people quit occasionally. Those numbers still cost the same in time and money.
You’ve felt it. Every time someone leaves there is a disruption to the team and/or clients, but there are also very direct costs.
Getting deeper into the numbers: According to the U.S. Bureau of Labor Statistics, the average monthly turnover rate for a company is 3.75% (averaging all industries together). That’s over 3 plus people that leave a 100-person team, per month, for various reasons.
To put this into perspective we will use the median personal income of a full-time employee, which is $52,104 according to the U.S. Department of Labor Bureau Labor Statistics report dated July 2020. Here is the math showing yearly costs of turnover for employers:
You have 100 salaried employees. Being very conservative and using a number less than half of the stats mentioned above, you have a monthly turnover of 1.5% from varied salary levels. Using the full median salary number (taking into account the varied salaries and other costs) your annual turnover costs are $938,000 per year.
And if you have 1000 employees the annual cost is approximately $9.38 million.
Unfortunately, there are also business disruption costs, beyond the costs above. Often, you do not realize these costs until the bad hire is removed.
These are the costs regarding money lost on:
time that was not productive by the individual
time that is not productive for the team
time the leader had to fill in, fight fires or fix the situation
time to transition the employee’s work in progress
disruptive costs with clients/customers
missed business opportunities
the exit costs
These costs are harder to figure out, but here are some ways to approximate the costs:
Lost productivity: Rule of thumb is approximately two-thirds of the revenue an employee generates for external customers should cover their salary, benefits, and overhead. The rest will be profit. The percentage breakdown is 66% cost and 34% profit. Depending on company costs, these percentages can slide either way.
For internal clients, the employee is supporting the company to bring in more revenue and will be a cost to the internal client, but will drive more revenue. This individual will be associated with the amount of revenue they were responsible for supporting.
To figure out costs: Determine the revenue each employee brings in and multiply it by 34% to figure out how much profit each team member brings in. Compare the current profit numbers to profit past numbers, when things were running at close to 100% productivity.
Time a leader has to fill in:
This one is easy, how much more are you working or how many hours are needed to get everything done now compared to before. Multiply this by your hourly salary (yearly salary divided by 52 and then that number divided by 40).
Disruption costs and missed business opportunities:
Look at budgets, looking at revenue trends for the past twelve months. Compare revenue and profits for the team.
If the position is not fully transitioned you can add the loss of revenue from that work not being done for the next four months (while recruitment, interviews, onboarding and getting the new employee up to speed is taking place).
Determine how much time and money was needed to transition the exiting employee’s work to someone else... and back to a new person if a new team member hired.
Determine the hours it took for Human Resources or anyone else to help this employee exit.
Take each individual’s hourly rate and multiply it by the hours used. Then add them together.
Now that you can see the cost, here is how to dodge a costly hiring mistake:
Define exactly what the candidate will need to bring to the company to be successful.
Write down what the new hire needs to accomplish in 3 months, 6 months, and in a year.
If you are like most hiring managers, don’t use an old job description. Physically write out all that skills the new employee absolutely needs and then write the skills you would like them to have.
Determine if the skills align with the goals. If they don’t, then determine why and what skills will get the end results, making the candidate successful.
Now you can look for a few old job descriptions and cross out everything that is not relevant, keep everything that is, and add to the list.
Make sure the hiring team knows what is absolutely needed and comes back to the discussion with tangible information regarding the needed skills and attributes.
Hire a great candidate!
TLR Search helps energy and chemical company hiring managers gain talent market share by bringing strong diverse talent to their door, while inspiring potential new team members to picture their future possibilities; especially with hard to fill positions. We are people experts with a specialization in energy and chemicals. We’re a woman-owned recruitment firm that partners with clients to assist them in placing decision-makers at executive levels, supervisors in functional management positions, and experienced professionals in technical roles.