Finance News & Insights

Hiring a bad employee can cost more than you’d think

Nobody wants to make a bad hire. But you may be surprised by just how much a single mistake can cost.

It turns out, there are six factors that contribute to the total cost of hiring a bad employee, according to

  • hiring costs
  • total compensation
  • cost of maintaining the employee
  • disruption costs
  • severance, and
  • any money lost on mistakes and missed opportunities.

If you add up the total spent on each factor for an under-performing employee who’s been let go, you can estimate how much money your company could have saved by hiring someone better.

The formula works across industries and can be applied to any level candidate.

For example, according to the formula, a poorly performing mid-level manager with an annual salary of $62,000 can wind up costing the company around $800,000 if he’s/she’s let go after two and a half years.

The costs drag on

Disappointing employees can also continue to cost you money after they’ve left the company. Each time an employee is fired, a position opens up. And that means your hiring committee will have to take time away from their day-to-day responsibilities to conduct recruitment, interview and track down references. It can lead to a lot time lost.

And when they find a good replacement, there’s still money to be spent on the new employee’s onboarding. U.S. organizations spent $156.2 billion on employee learning and development last year, according to the American Society for Training and Development’s 2012 State of the Industry Report.

The best way to avoid all these losses is to shore up your hiring process. For example, if you’re experiencing heightened turnover, try reviewing the interviews of under-performing employees to look for ways your company can improve its vetting process.


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