The real cost of a bad hire

Written by
RMI Team (F)

Bad hire – In an ideal world, the perfect candidate would be easy to find, easy to acquire and easy to onboard. Sadly, it’s not an ideal world. So, when you come across a candidate with a stellar CV, impressive interview responses and glowing references it’s hard not to get excited, “when can you start,” you ask. But the reality is first impressions can be very wrong. In fact, research shows 98% of CFOs in Singapore admit to a bad hiring decision.

The reason it’s so common is that hiring managers are battling a real war – they are under immense pressure to find strong talent, yet they are rushed into filling roles. The result is employees who are not up to the mark. The scariest part is when managing a bad hire who is underperforming it’s not uncommon to hear managers say, “it’s better than having nobody.” Perhaps when they find out the real cost of a bad hire, they’ll reconsider their opinion on this.

So, what is the real cost of a bad hire?

SGD 800,000. Minimum.

That jaw-dropping figure is for a mid-level manager making SGD 68,000 in annual salary who is not terminated within 2.5 years.  You can imagine how that figure balloons above 1 million for top-level executives. Let’s look at how this is broken down:

Hiring costs

This covers the typical costs that most people associate with a bad hire including advertising for the role, screening, interviewing, referencing and placement or recruitment fees which can be 20% of a candidate’s annual salary.

Salary and maintenance

Let’s face it, any compensation paid to a bad hire is as good as money poured down the drain, we factor in at least 30% of the first-year salary, plus any benefits.

Onboarding costs

First, there’s training and management oversight during onboarding and then there’s the fact that an average employee only performs at 50% productivity during the first 3 months.

Severance packages

This includes pay and benefits the bad hire receive when their employment contract ends. In addition to regular pay, it can also include untaken leave and additional pay based on the months of service.

Opportunity costs

These are the costs that would have been saved had a highly productive employee been hired in the first place. It covers lost productivity, reduced engagement, missed sales/growth opportunities and drop-in customers.

Disruption costs

The spiralling domino-like effect on the entire organization is what costs the most. A bad hire disrupts your once positive and energetic company culture and lowers the bar for your once superstar employees. Bad habits spread like a virus. While the bad hire is still onboard the rest of your team needs to pick up the slack, the reduced morale kills productivity, and it won’t be long before standards drop. Meanwhile, the manager, who is already overloaded with work, gets sucked into the time-consuming cycle of handling complaints, giving feedback, handing out discipline and facilitating the disciplinary process. Despite removing the bad hire, you will need to invest time and money to reset the bad behaviours through pre-employment checkups.

So, the next time someone tells you the cost of a bad hire is around 20-30% of their annual salary, don’t be fooled. It is indeed a serious five-figure sum that’s a threat to small companies, but larger companies who have provisions in place to take this kind of hit really need to understand that this ultra-conservative figure only touches the surface.

A manager’s job is to hire great employees, develop great employees and retain great employees. But, if we don’t get the hire right, the rest is impossible. Remember, it’s far more difficult and expensive to accommodate a bad hire than it is to invest in an effective candidate evaluation process. The best hiring managers know this and that’s why they are fighting tooth and claw to improve budgets for candidate selection processes.