4 Ways to Determine the Cost of a Bad Hire

Anyone who has to make hiring decisions knows how difficult the process is. It doesn’t help that bad hiring decisions can be terribly expensive mistakes, costing as much as 30 percent of the bad hire’s first-year earnings, according to the US Department of Labor.

While that number is alarming, one has to ask: Is it accurate for all bad hires at all businesses?

Some metrics are easy to track. For example, you can peg your customer acquisition cost by simply dividing your marketing and sales expenses by the number of new deals struck.

HR metrics, on the other hand, tend to be much trickier. Human behavior can’t be directly converted into hard numbers like recurring revenue or cart conversions.

That’s not to say it’s impossible to track HR metrics — only that we have to get a little more creative. Here are four simple formulas you can use to determine how much a bad hire will really cost your business.

1. Time Spent on Hiring

The process of finding candidates, interviewing them, and onboarding new hires can take days, weeks, or even months. No business can afford to spend all those man-hours on an employee who just leaves right away.

To determine exactly how much money you are losing to the amount of time spent on the hiring process, start by identifying all employees involved in the process. For example, that might include a departmental head, two HR team members, and the CEO.

Next, calculate how many hours per week each person spends on hiring-related tasks. Say a member of the HR team spends 30 hours each week on recruitment activities: You would then multiply that number by the employee’s hourly rate to measure how much that employee’s hiring tasks cost you. So, 30 hours per week at $20 per hour equals $600 per week — and that’s just one member of the hiring team!

2. Revenue Per Employee

A high-performing employee is great for the bottom line — but can we quantify that impact in hard numbers?

We can, and it all starts with identifying revenue per employee. This figure can usually be found in a company’s year-end financial report or SEC report, if it is a publicly traded company. Next, multiply the revenue-per-employee figure by 40 percent for an estimate of the profit margin per hire.

Say the revenue per employee is $200,000; this would make the profit margin per hire about $80,000 per year. However, an employee in the top 25 percent of the talent pool should be able to bring in at least an additional 25 percent in profit. In this example, an average hire brings in $80,000 in profit, but an above-average hire brings in at least $130,000. A poor hiring choice here results in a $50,000 cut to potential profits.

3. Cost of Recruitment Marketing

Recruiting obviously costs money, but tracking just how much money you spend on recruiting can help you determine how effective your process is.

The formula for determining recruitment marketing costs is simple: advertising cost per position times number of open positions equals total recruitment marketing cost.

Say your company spends an average of $300 per month on advertising for each available position. If there are 10 open positions, that is $3,000 spent on job ads alone. Seeing this number might cause you to reconsider whether you’re putting your recruitment marketing dollars to the most effective use.

4. Employee Turnover Rates

A bad hire certainly has an impact on overall employee engagement and productivity, but measuring that impact is extremely difficult. The best way to get handle on it is to look at turnover rates.

Start with a couple of numbers:

1. Number of regrettable departures (ND) = the number of employees at the organization multiplied by the annual turnover percentage
2. Average cost of departures (C) = the cost of hiring plus the cost of onboarding and training plus the cost of learning and development plus the cost of the time spent filling the role

Once you have those numbers, multiply ND by C to find the annual cost of turnover.

Here’s an example for a 100-person company with a 10 percent annual turnover rate: Say hiring costs $20,000 per employee, while onboarding, learning, and development cost $10,000 per employee all together. In addition, the time spent filling a role cost $40,000 on average. This would make the annual cost of turnover $700,000. (ND = 10; C = $70,000; 10 times $70,000 = $700,000.)

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These formulas probably tell you what you already knew: a bad hire is costly. However, they also offer a more concrete way to understand what your hiring costs are and why bad hires can cause such damage. By using these formulas to track your hiring and turnover costs, you can identify areas for improvement and optimize your hiring process for best results.

Darren Bounds is the CEO and founder of Breezy HR.