What is the average cost of a bad hire?

There are several dimensions to the cost of a bad hire.

1. We tend to focus on the expense---their fully burdened salary, all expenses, etc. This is actually the smallest cost of a bad hire.

2. The managerial time and the impact on the organization is a tremendous cost. A bad hire diverts a lot of management time to deal with the situation--whether it is coaching or addressing performance issues, or other areas. Additionally, a bad hire can have a morale impact on the rest of the organization, adversely impacting productivity.

3. The BIGGEST cost of a bad hire --- and an open territory is the opportunity cost and lost business. This can amount to millions. A bad hire is probably losing a significant amount of business, resulting in lost revenue. A bad hire may be creating customer satisfaction problems, resulting in more lost revenue--perhaps driving customers away. Surprisingly, most organizations don't look at the opportunity cost and lost revenue resulting from bad hires. As I mentioned, this is usually in the millions and is absolutely unacceptable.

Hiring the wrong Inside Sales Agent to begin with is the root cause of most performance issues. It’s also a significant drain on the Budget & Bottom Line, on Customer Satisfaction Ratings and on Sales Results. Every failed hire represents wasted dollars down the drain. Not to mention the lowered productivity, poor morale & higher absences associated with a poor job fit.

Stick your head into most any Inside Sales Dept. and you’ll typically find 3 grades of Agents at work: (Above Average), (Average), and (Below Average).

(Above Average) Inside Sales Agents seem to have “The Right Stuff” that pushes them to succeed & a natural compatibility with the duties of the position. They work hard - exceed expectations - do more than asked - achieve high-quality consistent sales results - can always be counted upon - need little direction & work extremely well with everyone.

(Average) Inside Sales Agents perform their duties adequately enough “to get by” - but no better. They are the partially competent. Generally they’re strong from a Skills standpoint but missing a key ingredient or two from a Job Fit/Sales Closing standpoint.

(Below Average) Inside Sales Agents are the people who just don’t fit somehow. Sometimes they’re good people in the wrong jobs. They need extra coaching & supervision just to achieve below-average results. Often they cause unnecessary conflict. (Below Average) Inside Sales Agents have the highest Levels of Absenteeism, lowest Levels of Productivity & Sales, poorest Performance & Customer Satisfaction Ratings, and generally have a Negative Impact on Team Morale. They represent the real problems in an Inside Sales workforce. While (Average) & (Below Average) Inside Sales Agents may seem fully qualified at the Interview Stage – they’re a Poor Job Fit – the cost of hiring them is enormous – with little value add to the organization.

There are different types of Turnover within an Inside Sales environment.

There is ‘Good Turnover’ – such as an Internal Promotion or Department Transfer. ‘Good Turnover’ typically represents about 10% of an Inside Sales Dept.’s Annual Turnover Rate.

There is ‘Involuntary Turnover’ – such as Illness, Family Issues, and Relocation. ‘Involuntary Turnover’ also typically represents about 10% of an Inside Sales Dept.’s Annual Turnover Rate.

Then there is ‘Dysfunctional Turnover’ – represented by ‘Quick Quit’/’Fast Fire’ and ‘Bad Hire’ Turnover – and represents 80% of an Inside Sales Dept.’s Annual Turnover Rate.

The above highlights the costs associated with “doing a quick hire and having it turn out badly”.

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Great answers to this question. A quick rule of thumb for the cost of a bad hire: take the recruiting, training, management, salary, benefits, benefits administration, travel and entertainment and miscellaneous costs. Total them, and multiply by 10. The result is a low estimate for the cost of a bad hire.

Opportunity costs . . . What about the "good hire" that got away? Sales team morale? Customer bad will? Bad word-of-mouth? Ethical risks (huge!--see link below). These are just a few of the soft costs to consider.

I still have my boss's admonition ringing in my ears when I was a first time manager, "Andy, if you ever have to let someone go from your department, I'm going to come to you and ask you why you (screwed) up!" I never forgot that, and I think it's healthy for every manager know that the responsibility begins with the hiring manager.

Please see the related article "On My Honor as a Salesperson: Why Sales Ethics Matter." The cost of this bad hiring decision went well over $1 million . . . http://www.customerthink.com/article/why_sales_ethics_matter

Assuming your bad hire results in the need to involuntarily separate that individual and replace them, I always use .5 annual salary for hourly/low to middle level positions and 1.5 annual salary for management/senior level positions in order to quantify the cost of that loss (including opportunity and productivity) and replacement. Any time I've tried to quantify each and every component, it always comes out somewhere in that range anyway. It's certainly a much easier benchmark to use than having to go through an extensive analysis. Here is some reputable validation for this benchmark:

American Management Association: “Estimates of turnover costs may range from 25 percent to almost 200 percent of annual compensation. Costs that are more difficult to estimate include customer service disruption, emotional costs, loss of morale, burnout/absenteeism among remaining employees, loss of experience, continuity, and ‘corporate memory.’” KEEPING THE PEOPLE WHO KEEP YOU IN BUSINESS: 24 Ways to Hang on to Your Most Valuable Talent by F. Leigh Branham (AMACOM; October 2000)

Hay Group: The number cited is 1.5 times the salary for a manager or professional, and half the salary for an hourly worker. However, when a senior-level person occupying a crucial role or a high performing sales person leaves, the costs can be as much as twice the salary.

Hewitt & Associates (AON): 50% (hourly/wage) - 150% (professional/specialized)

Saratoga Institute (PwC): 150% of Salary

Users of the Bliss-Gately Tool calculate the cost of replacing employees at 150% of annual salary for a $50,000 per year employee. One client, a Ph.D. in Economics, used the Bliss-Gately Tool to justify a 300% buy out provision of the employment contract of a former executive of a fast food chain.

I would start at 150% and add in the negative impacts of a bad hire on the work product of other employees.

"Is it worth it financially to do assessments prior to your hiring process?"

Why would any employer use any assessment if it did not make or save them money? To believe that assessments are money losers is to presume that all the users are wrong. Hint, when we presume that everyone else is wrong, we are most likely wrong ourselves.

The Executive Vice President of an insurance company said, "Every time we pay the assessment company $10,000 our EBIT goes up by $75,000," EBIT = Earnings Before Interest and Taxes. The minimum ROI is 300% with many users reporting an ROI well in excess of 1,000%.

Since the cost of assessments is about $500 per position filled it is cheap insurance against the cost of a bad hire which is ranges from tens of thousands of dollars to hundreds of thousands of dollars and more.

A better question is, "Why don't all employers use assessments?"