June 23rd, 2014 | Sterling

The Real Cost Of A Bad Hire Will Shock You

The real cost of a bad hiring decision | SterlingBackcheck

Despite all your hiring committees, phone screenings, in-person interviews, tests and other vetting tricks, you can still hire the wrong person for the job.

It happens all the time and to the best of companies.

Take Yahoo, for instance. It’s been on a hot streak as of late under new CEO Marissa Mayer, but it (and Mayer) made an embarrassing blunder in hiring Henrique De Castro as COO in 2013.

Barely 15 months later, De Castro—who made a bit of a bad name for himself at Yahoo (and at Google previously) with his confrontational management style — was unceremoniously let go.

The real shocker? De Castro walked away with a $58 million payoff, possibly the largest golden parachute in corporate history.

So most bad hires aren’t in the executive suite and won’t get any kind of parachute, golden or otherwise, upon their departure. But they still cost you dearly.

How dearly? In putting together our new Screen Now, Save Later white paper (download your free copy here), we pulled some numbers and they will shock you.

How A Bad Hire Drains Your Company

The U.S. Department of Labor estimates that hiring the wrong person can cost an organization roughly three times that person’s annual salary.

But it’s not just about salary and time spent recruiting and onboarding a bad hire. It’s also about the downstream costs of disrupted sales, damaged client relationships, department re-organizations, even computer hardware and IT support.

Hiring guru Bradford Smart puts it all into greater—and scarier—perspective. He estimates the cost of a bad hire to be from four times annual salary for supervisors all the way up to 15 times annual salary for vice presidents and executives.

Here’s an eye-opening example from Smart’s recent e-book, Topgrading 201:

Sales Representative
Hiring Costs $23,500
Compensation $151,000
Maintenance $14,000
Severance $25,000
Opportunity Costs $250,000
Disruption Costs $100,000
Total Cost $563,500

But Wait, There’s More!

A bad hire can result in a number of painful and costly secondary outcomes, including:

  • Theft or embezzlement.
  • Damaged employee relations and morale.
  • Endangerment of employees, clients, and business associates.
  • Lost productivity.
  • Litigation.
  • Public scandals and negative publicity.

While all of the above can prove costly, things get really expensive when an employee commits fraud. Of the U.S. companies that participated in PricewaterhouseCooper’s Global Economic Crime Survey 2014, 56% reported experiencing fraud in excess of $100,000 while 8% reported fraud in excess of $5 million.

For many companies, fraud and corruption charges often results in expensive regulatory fines or sanctions.

Free White Paper: Screen Now, Save Later

We break down all the costs associated with a bad hire—and detail how you can save your company time and money through a smart screening program—in our new white paper Screen Now, Save Later.

You can download a copy today right here.

This publication is for informational purposes only and nothing contained in it should be construed as legal advice. We expressly disclaim any warranty or responsibility for damages arising out this information. We encourage you to consult with legal counsel regarding your specific needs. We do not undertake any duty to update previously posted materials.