How Much Is That Bad Hire Costing Your Business?

HIRE DEVELOPERS FOR STARTUP | TURNKEY

Closing a position is always an exciting moment for a hiring team and a department leader. Your search is done, you have survived dozens of interviews, assessments, and test tasks, and now it is time to reap the rewards! But sometimes the rewards are actually disappointing rather than encouraging. A new hire turns out to be a bad match, and once again, you are bound to dive deep into the demanding recruitment cycle.

Well, he that never climbed never fell – everybody makes mistakes, this is a part of human nature. However, some mistakes are too costly, and you can not afford to make them on a regular basis. So what is the real cost of hiring the wrong person? And, the more important question: how to prevent this from happening? TurnKey Tech Staffing is here to give you answers.

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Table of Content

The Immediate Financial Costs

Hiring a new employee is a significant investment, and you need to understand what it entitles. So, let’s figure out the structure of hiring costs for a new developer.

Recruitment Expenses

When looking for a new hire, companies typically incur costs such as:

  • Advertising. Posting job listings on various platforms can be expensive, especially if you’re targeting multiple channels to reach a wide audience.
  • Recruitment agency fees. Many companies rely on recruitment agencies to find suitable candidates. These agencies often charge a significant fee, sometimes a percentage of the new hire's annual salary.
  • Background checks and screening. Ensuring a candidate is the right fit often involves background checks, which come with their own costs.

Onboarding and Training Costs

Once a candidate is hired, onboarding and training are essential to integrate them into the company. These costs include:

  • Orientation programs. Time and resources spent to introduce the new hires to company policies, procedures, and culture.
  • Training sessions. Investing in training to equip the new hire with the necessary skills and knowledge to perform their job effectively.

Salary and Benefits

During the initial phase, even if the new talent is not fully productive, the company is still paying their salary and benefits. This includes:

  • Base salary. The agreed-upon compensation for the role.
  • Benefits package. Health insurance, retirement plans, paid time off, and other perks are part of the employment package.

The Compound Costs of a Bad Hire

Now, consider what happens when a hire turns out to be a bad fit. The costs are twofold: you bear the initial hiring expenses for the wrong hire, and then you must repeat the process to find a suitable replacement.

Cost of the Bad Hire

  • Lost productivity. A bad hire may underperform, resulting in lower productivity and potentially causing issues within the team.
  • Disruption. The presence of a bad hire can disrupt workflows and negatively impact team morale.
  • Termination costs. If you decide to terminate the bad hire, there might be costs associated with severance pay and legal fees.

Re-Hiring Expenses

After letting go of a bad hire, the company needs to start the hiring process anew, doubling the initial costs:

  • Additional recruitment expenses. Reposting job ads, engaging with recruitment agencies again, and conducting more background checks.
  • Onboarding and training the placement. The new hire will need to go through the same onboarding and training process, incurring additional costs.

In essence, a bad hire means you’re not just paying for one hire, but for two. The initial investment in the bad hire, followed by the need to repeat the process to find and train a replacement, amplifies the financial burden on the company.

Hidden Costs

Beyond the immediate financial expenses, a bad hire incurs several hidden costs you might not consider immediately. This means that a bad hire costs a company much more than just the sum for re-hiring for the position.

Opportunity Cost

Every business decision carries an opportunity cost, which is the potential gain lost when choosing one option over another. In the context of a bad hire, the opportunity cost is substantial. First, the time and resources spent on a bad hire could have been invested in a more suitable candidate who could contribute positively to the business. Second, a bad hire can slow down projects, delay innovation, and prevent the company from capitalizing on market opportunities, ultimately affecting the bottom line.

Lowered Team Morale

A bad hire can have a detrimental effect on the entire team, leading to decreased morale and motivation. This leads to several not-so-good consequences. First, other team members may have to pick up the slack for the underperforming employee, leading to burnout and frustration. Second, the presence of a bad hire can create tension and disrupt team dynamics, resulting in a toxic work environment. Good employees may become disengaged and demotivated, affecting their productivity and satisfaction with their roles.

Lost Productivity

One of the most significant hidden costs of a bad hire is the impact on overall productivity. When hiring a new person, it is natural that there is a ramp-up period before they become fully productive. This period typically spans a few months as the new hire gets onboarded and fully integrated into the team.

It takes time for a new hire to start bringing substantial value to the team. If the hire is a bad fit, this period is wasted, and the company must start over with a new candidate. Wasting time on hiring, firing the wrong person, and then looking for a new one compounds the loss. Not only do you incur the direct costs of hiring twice, but you also miss out on the value a good hire could have generated if they were hired from the beginning.

Quantifying the Total Cost

Let’s talk hypothetical numbers. So, imagine there is the case of a tech company hiring a software developer. We’ll break down the costs into direct, hidden, and opportunity costs, assuming a base salary of $30,000 and annual benefits of $6,000.

Direct CostsHidden CostsOpportunity Costs
Recruitment Expenses:
  • Job Advertising: $1,000
  • Recruitment Agency Fees: 20% of annual salary ($6,000 for a $30,000 salary)
  • Background Checks: $200
  • Total Recruitment Expenses: $7,200
  • Lost Productivity:
  • During the onboarding period (6 months), we assume that a new hire operates at 50% productivity.
  • Value of full productivity for 6 months: $15,000 (assuming full productivity yields $30,000 annually)
  • Actual productivity of a bad hire: $7,500 (50% of the value)
  • Lost productivity due to bad hire: $7,500
  • Missed Potential:
  • If a good hire were made initially, their productivity after the onboarding period would start contributing significantly.
  • Potential value generated by a good hire in 6 months: $15,000
  • Opportunity cost: $15,000
  • Onboarding and Training Costs:
  • Orientation Program: $500
  • Training Sessions: $3,000
  • Total Onboarding and Training Costs: $3,500
  • Lowered Team Morale:
  • Impact on team productivity: 10% decrease for a 5-member team over 6 months.
  • Team's annual productivity: $150,000 (assuming each member generates $30,000 annually)
  • Lost productivity due to lowered morale: $7,500 (10% of $75,000 for 6 months)
  • Additional Recruitment Cycle (due to bad hire):
  • Repeating the recruitment and onboarding process incurs the same initial costs.
  • Additional recruitment expenses: $7,200
  • Additional onboarding and training costs: $3,500
  • Salary and benefits for 6 months for the new replacement: $18,000
  • Total additional costs: $28,700
  • Salary and Benefits:
  • Base Salary: $30,000 annually (approximately $2,500 per month)
  • Benefits Package: $6,000 annually (approximately $500 per month)
  • Total Salary and Benefits (for 6 months): $18,000
  • Total Initial Direct Costs: $28,700 Total Hidden Costs: $15,000 Total Opportunity Costs: $43,700

    Grand Total Cost of a Bad Developer Hire: $87,400. A scary number, isn’t it?

    How to Prevent a Bad Hire?

    To avoid this costly mistake, you need to ensure that any candidate you want to hire is a 100% match. It is a whole science, and we believe we cracked the code, as 95% of clients are satisfied with our recruiting process. 

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    TurnKey Tech Staffing: Your Partner in Finding the Right Talent

    TurnKey Tech Staffing knows how to find the right talent. We take just 21 days to identify and present the five strongest candidates for you to consider. The candidates our clients decide to hire typically stay within their company for at least three years, thanks to our one-of-a-kind candidate sourcing and additional retention programs.

    So what makes our talent sourcing so effective?

    First, we take the time to thoroughly understand our client’s needs and expectations, including the specific skills, experience, and cultural fit required for the role. We need to be on the same page, so our hiring managers can identify specialists that will click with your team.

    Our screening process is among the most thorough in the market. It involves multiple stages:

    • HR interviews. Initial interviews to assess soft skills, cultural fit, and career goals.
    • Behavior interviews. Interviews to assess past behavior in specific situations to predict future performance and suitability for the role.
    • Technical screening. In-depth evaluations conducted by experienced tech specialists to ensure candidates possess the necessary technical skills.

    This comprehensive approach ensures that by the time candidates are presented to you, they have already been meticulously vetted and are highly likely to succeed in your organization. By the way, you can learn more about our screening approach in this article.

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    Our retention program further supports their long-term integration and satisfaction, ensuring they remain valuable members of your team for years to come.

    Hire top offshore developers easily with TurnKey Tech Staffing

    Summing Up

    A bad hire implies much bigger financial losses than the initial cost of replacing them with another hire. You lose in hidden costs, you jeopardize teams’ integrity and morale, and you miss potential opportunities for the growth of your business. These aspects say the best about hiring the right person from the start.

    A thorough approach to candidate screening is key to avoiding the mistake of bad hires, and in the niche of hiring top tech talent, TurnKey Tech Staffing can help you. Feel free to contact us – we will gladly find that one unicorn you are seeking for your team!

    FAQ

    What are the most significant hidden costs associated with a bad hire?

    The most significant hidden costs of a bad hire include:

    • Lost Productivity. A bad hire may not perform at the expected level, leading to decreased overall productivity. Additionally, the time spent managing a bad hire could have been better used on productive activities.
    • Lowered Team Morale. The presence of a bad hire can disrupt team dynamics, cause frustration among team members, and lower overall morale. This can result in decreased engagement and productivity among other employees.
    • Opportunity Cost. The time and resources spent on a bad hire could have been invested in a more suitable candidate who would contribute positively to the company's growth and success. This missed opportunity can have long-term financial implications.

    How can companies accurately assess the cost of a bad hire?

    Companies can assess the cost of a bad hire by considering both direct and hidden costs. Direct costs include recruitment process expenses, onboarding and training costs, and salary and benefits paid to the bad hire. Hidden costs encompass lost productivity, lowered team morale, and opportunity costs. To accurately calculate these costs:

    • Track Recruitment and Onboarding Expenses. Keep detailed records of all expenses related to hiring, including job advertisements, recruitment agency fees, and training programs.
    • Measure Productivity Loss. Estimate the impact of the bad hire on overall team productivity and project delays.
    • Evaluate Opportunity Costs. Consider the potential value a good hire could have generated during the period the bad hire was employed. By combining these factors, companies can gain a comprehensive understanding of the financial impact of a bad hire.

     

    June 19, 2024

    TurnKey Staffing provides information for general guidance only and does not offer legal, tax, or accounting advice. We encourage you to consult with professional advisors before making any decision or taking any action that may affect your business or legal rights.

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