From the Desk of Brad Smart: Estimate the Cost of Your Mis-hires

When CEOs, HR managers, and hiring managers, at all levels, take a few minutes to systematically estimate the costs of mis-hires, they are shocked … they then become more motivated to improve their hiring methods.

Google “costs of mis-hires” and you’ll see estimates ranging from 1/10 of a person’s salary (entry-level job), to $62,500 (Fast Company, average job), to over $100 million ($100,000,000).

Tony Hsieh, former CEO of Zappos, estimated the cost of all of his mis-hires to be well over $100 million ($100,000,000). Several years ago one of Chief Executive Magazine’s cover articles showed the cost of a mis-hired CEO earning $1 million ($1,000,000) to be $27 million ($27,000,000).

Topgrading’s Cost of a Bad Hire Calculator was designed to show organizations how much time and money is wasted when new hires underperform and/or do not fit the company culture. Our calculator is cited often – this is probably because it generates a pretty complete list of all costs incurred when a mis-hire happens.

Below you will find a summary of where mis-hire money and resources are likely spent.

Hiring Costs:

  • Recruitment, search, and advertising fees
  • Outside testing, interviewing, background checks
  • HR department time and administrative costs (for all candidates interviewed, not just the one hired)

Compensation:

  • Salary and bonuses multiplied by the number of years employed
  • Stock options, benefits, direct business expenses
  • Training costs

Severance:

  • Severance fee (salary, benefits), lawyer fees
  • Outplacement counseling fees
  • Cost in lawsuits caused by person (EEOC, harassment, OSHA, etc.)
  • Administrative costs in separation

Opportunity Cost:

  • Loss of new business, ideas, and energy a great employee would have brought to the organization
  • Loss of production due to lower morale from other employees
  • Value of a key customer who was lost, driven away… or never became a key customer

Wasted Hours

  • Number of additional hours spent dealing with the mis-hire’s weaker points, patching things up with customers, re-doing or double-checking work, increased workload due to the mis-hire not being able to handle their own workload

Several years ago, when sitting with an executive team, we asked them to estimate the cost of a mis-hire that they were all familiar with, and WOW, the individual estimates averaged $300,000, and the team estimates, after hearing all the individual estimates, were twice as much.

Cost of Wasted Hours

Over the years, many executive teams have insisted on estimating the “wasted hours” spent fixing and preventing problems caused by low performers. “Wasted hours” has quotation marks because those hours are NOT wasted – they are spent doing damage control.

If you are disappointed by painful mis-hires, don’t blame yourself – your hiring method has let you down. Using our Cost of a Bad Hire Calculator might help motivate your team to consider trying out a better, more effective method.

Contact us to learn more.


Improve your hiring success with Topgrading. Our proven hiring process will transform your selection methodology so that you get better hiring results across all industries, including hiring HR professionals.  Our leadership and candidate assessment tools will help you assess, hire, retain, and grow outstanding team members. Contact us to learn more!

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