How much does a bad hire REALLY cost your business?

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According to a recent study undertaken by job site Indeed, small businesses are hiring an average of three candidates annually that don’t work out long-term.

From rushing into making a decision to get the vacancy filled to a limited talent pool, the reasons given for bad hires are numerous, but the fact remains that whatever the reason for the candidate not being a good fit, them leaving resonates throughout the business in more ways than one.

However, despite these findings, more than a third of companies believe that these hiring mistakes have zero financial impact according to a survey carried out by the Recruitment & Employment Confederation (REC), which is why we want to try and set the record straight and help local businesses understand the true impact that recruitment mistakes can have upon your bottom line.

Let’s talk money

It’s often difficult to appreciate the accumulation of costs that come along with each candidate offered a role, so we’ve broken this down for you in an example that we’ll call ‘Sam’.

Sam has been recruited to lead a small team in a senior management role. They have five direct reports and have accepted an annual salary of £75,000.

Should Sam not be a good fit for the business and leave within 12 months, he’s a breakdown of the potential costs:

Recruitment fees: For a senior management role, a 15% fee is considered normal from a recruiter perspective and equates to a financial loss of £11,250.

Performance costs: A poor transition for Sam also influences the performance of their direct reports that can result in a 15% reduction in productivity at a cost of £40,500 for a team with annual budget costs of £270,000.

Staff dissatisfaction: A cost usually overlooked by employers is staff dissatisfaction and in this example, 20% of Sam’s team could leave due to issues such as poor management. For team members, you’re usually looking at 50% as a low-end estimate of their annual salary as a cost for losing them. 

Taking the salaries of the five team members as an average of £54,000 and assuming that two leave, you’re looking at a salary only figure of £180,000 before you’ve even calculated the recruitment costs and lost productivity.

Cost of attrition for losing Sam: Research has shown that 23% of new starters leave their role within 12 months In the case of Sam, as a senior member of staff, the attrition cost stands at anywhere between 150-400% of their salary, so using the lowest possible percentage, this financial loss stands at £112,500.

Therefore, the total financial risk of Sam as a bad hire adds up to at least £272,250 to the business through lost recruitment costs, poor productivity, team members leaving and attrition costs.

Non-financial costs of a bad hire: As well as the costs detailed above, the non-financial costs of a bad hire are also worthy of note in most cases as the candidate leaving can (and often does) resonate throughout the business and beyond.

From increased workloads for remaining team members adding to the pressure at work to low morale causing a dip in productivity and performance, these non-monetary ‘costs’ to a business should not be under-estimated.

It’s worth considering business reputation in an economy where competition for top talent is fierce, as a candidate voicing their dissatisfaction to others in their circle can influence future potential hires and even the perception of the business to key clients.

How do I reduce the risk of a bad hire?

Many of the reasons cited for a bad hire are most certainly overcome with a little support, and this is a topic that we’ll revisit again shortly with some practical expert recruitment advice on how to reduce your risk when filling a vacancy, so be sure to bookmark our blog for more free resources.

If you’re currently in the process of hiring, get in touch with the Recruitment Robin team today and let us guide you on a successful strategy for finding the ideal candidate who’s a perfect fit for your business and reducing the risk when recruiting.