4 Reasons why bad hires cost so much

*This blog was originally published by Hogan Assessments

Everything is getting more expensive these days, and bad hires are no exception. According to the U.S. Department of Labor, employees who fail to live up to expectations usually cost their organizations at least 30% of their first-year earnings.¹ And the indirect costs of a bad hire? They can be even more draining.

While there are wide-ranging reasons why bad hires are so expensive, let’s review four of the most common reasons why bad hires cost so much.

1. Compensation

Employees are paid salaries in exchange for services they’re expected to render. If a bad hire delivers subpar services (or doesn’t deliver at all), other employees must fix the bad hire’s work or repair additional problems that the person causes — meaning they have less time to perform their own work responsibilities.

Add the cost of the bad hire’s benefits to the equation, and the financial hits can really add up. While an entry-level employee’s salary and benefits might not bankrupt an organization, multiple bad hires or a bad hire in a leadership position threaten forward momentum.

2. Onboarding

Savvy employers know that investing resources and energy into the onboarding process will deliver returns in employee productivity later on. Therefore, they encourage managers to spend substantial one-on-one time integrating new hires into their teams. Employers also use resources from HR and other central departments to provide new hires with a comprehensive orientation, process their documents, and equip them with office supplies, software, and equipment.

In all, the costs of onboarding can equal 16% to 20% of an employee’s annual salary.² When you consider the fact that it takes up to eight months for a new hire to be productive in their role and that 23% of these employees turn over before their first anniversary, the loss of resources from onboarding bad hires can be staggering.³

3. Opportunity

People power is the center mass in the work-worker-workplace trio, and a single bad hire has the potential to throw an entire organization off balance. Every second that a bad hire spends not living up to their job description represents a rising opportunity cost for employers. With a talent shortage in full effect that has no sign of slowing anytime soon, employers cannot risk losing out on candidates who would be better aligned with organizational goals.

Some bad hires can clog talent pipelines. A particularly charismatic one might even cause employers to overlook more effective employees in succession planning. If an ineffective employee is in a role that influences revenue generation or customer retention, opportunity costs can be astronomical. For example, a salesperson who consistently alienates customers can drive business to the competition.

4. Engagement

Bad hires can erode the engagement of other employees. Their behaviour can impact overall productivity. For example, a bad hire might slow or sabotage workflows, spread contagious negativity, or introduce bad work hygiene into the organizational culture. And a poor review posted on a job forum by a disgruntled ex-employee? That could surely undercut talent attraction efforts.

With employee engagement rates at just 49% as of 2020, employers cannot afford to let a bad hire incite disengagement within their organizations.⁴ Lost employee engagement costs the United States $1 trillion, or 10% of GDP, per year, and employers bear the brunt of these costs.⁵

What Can Be Done?

You get the point: bad hires are not cheap. In some cases, they can even be dangerous or fatal. Unfortunately, they’re not uncommon either, as nearly three-quarters of hiring managers admit to having made a bad hire.⁶ Often, this happens because they need to fill a role quickly but don’t have a sound talent acquisition strategy.

Effective talent acquisition requires more than simply finding people with the appropriate experience and hard skills. Instead, soft skills are often what determine who is a good hire: Do they get along with others? Do they enjoy the work, and are they motivated to do it? Do they have values that align with those of the organization?

So, how can hiring managers find employees with suitable soft skills? Take an evidence-based approach to talent acquisition. Interviews are well documented to have insufficient predictive validity for effective job performance, so exhaustive interviewing is not the solution. Moreover, nearly one-quarter of hiring managers say they just don’t have the skills to avoid bad hires and select the right people.⁷

But well-validated personality tests offer proven insight into candidates’ soft skills and even shorten time to hire. Paired with structured interviews and other complementary evaluation methods, personality tests can help employers root out bad hires from the candidate pool and identify the ideal candidate for nearly any job role — saving money, time, and of course, morale.

For a full list of references, please refer to the original Hogan blog.