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The Cost of a Bad Hire: Factors to Consider

Productivity Loss:  Here’s a way of figuring the financial cost of a bad hire, by looking at the productivity loss of the person who’s leaving, before the announcement that he or she is leaving.

It’s based on the principle that you’re paying the person 100% of the employee’s salary, but you’re getting much less back in return.  For instance, if the person is working as hard as possible all the time (and nobody does this), you’d be getting back 100% of productivity, right?

You’re paying 100% of salary, and getting back 100% of hard work.

But if that person is doing only 65% in terms of working hard, your loss is 35% (100% [the hard work you expect] – 65% [what you actually get] = 35%).  So, your financial cost—what you’re actually losing in the transaction—is 35% of the person’s salary during any given period.

This is looking at the financial cost of just the bad hire.  But we also have productivity losses on others, and these are harder to calculate because they’re based on time spent on activities related to the “bad hire.”  Harder to calculate, but they’re still part of the equation.

Now let’s look at all the elements that add up to the financial cost of a bad hiring decision.

Before the decision to leave (firing, or the person decides to resign):

  1. Productivity loss of the person before the announcement that the person is leaving.  This lack of productivity may be the reason you’re firing the person.  (This is the 35% of salary.)
  2. The productivity loss due to other performance problems.  For example, if the person has been argumentative, obnoxious, etc., that performance problem is a distraction that drags down other people’s productivity.
  3. Productivity loss because of time spent by others who have to pick up the slack while the employee is being trained.
  4. Productivity loss because of time spent by everyone else to pick up the slack for those covering the employee.
  5. Productivity loss because people are grumbling about the situation.  (Why did we hire this slacker?  And, why do I have to pick up his/her slack?)
  6. Cost of the things not getting done because of all of the above—something has to be lost, because so many resources are being devoted to the “bad hire.”  These things could be anything from inefficiencies to losing clients because work isn’t done properly.

Cost Estimates:  The cost of a “bad hire” is astronomical.  Some estimates I’ve seen:

  • $25,000
  • 50%-150% of the person’s annual salary
  • At least 3 month’s salary

The Solution:  Because this cost is so great, you need something to improve your hiring process, and the decisions that flow form the process.  That “something” is PXT Select.

  • PXT Select™ is an online selection assessment that makes the very human decisions about hiring simpler and smarter.
  • This assessment helps fill the gap between the résumé and the interview. It provides organizations with actionable objective data about candidates in a simple to understand format that can help you to interview better and hire smarter.
  • PXT Select™ is comprehensive in that it measures 3 areas that impact an individual’s approach to situations in the workplace:  The candidate’s:
    Thinking Style            Behaviors           Interests
  • Assessment results equip organizations and hiring managers with easy to understand information about the candidate, and provide intuitive questions to strengthen the interview process.

For more information on how PXT Select can vastly improve your hiring decisions, and help you avoid the astronomical costs of a wrong decision, contact me at 856-218-7200 or terry@terrywall.com

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