How Much Does a Bad Hire Cost Your Business?

By Adam Robinson,
January 8, 2014

If you’re familiar with department store, J.C. Penney, then you’re probably aware of the embarrassing bad hire fiasco the store battled the past 2 years.

First they built a ton of anticipation and PR around their new (former Apple exec) CEO hire Ron Johnson and then following his lead, turned the store from a traditional consumer shopping center to a new-age “we are trying to be hip, is it working?” store experience.

To put it lightly, it stunk. With Johnson fired after 17 months and a new CEO in place to clean up the mess, J.C. Penney’s shares are now trading at a 25-year low. OUch!

How can you be sure you don’t ruin your business with a bad hire? First, become aware of the potential costs of a bad hire or employee, and make sure you can handle the fall-back.

6 Ways to Calculate a Bad Hire Cost

Dr. John Sullivan provided six ways to calculate a bad hire cost in his latest article on TLNT titled, Calculating the Costs of a Bad or Under-Performing Employee.

Step 1 – Determine what an average employee is worth

In order to calculate Step 1 you need to take the total amount of revenue in a year and divide it by the number of employees.

So if your company makes $500,000 in revenue a year and you have 12 employees then the average employee is worth about $41,667. Which means an employee performing 10% better would be worth about $46k and an employee performing 10% worse then average would be worth about $35k.

Step 2- Determine the differential between an average and a weak employee in the same job

Sullivan recommends focusing on salespeople in this step as they tend to show a clear ranking and their results are closely measured. First start by ranking your salespeople in a list from best to worst according to performance. Then find the salesperson directly in the middle of the ranking, “their sales number is designated as the ‘average sales amount.'”

Using that average sales amount, calculate what percentage below the last person on your ranking list produces. Sullivan uses the example of 30%.

Step 3 – Quantifying the value of the ‘weak performer differential’ percentage

In Step 3, Sullivan multiplies the 30% below average sales employee by the average revenue number we calculated earlier. In this example it was $41,667. So we the cost of keeping a bad sales hire or employee is around $12,500 a year.

Pretty frightening huh?

Step 4 – Determine the ‘weak performer differential’ for other jobs

Now do it for other jobs around your business. Sullivan states,

If you perform the same calculation for other jobs where on-the-job performance is already quantified (like customer service, programmers, accountants, or any revenue-generating job) you can get a better idea of what the average performance percentage difference is for a number of different jobs.”

Step 5 – Adding other ‘weak performer costs’ to the calculation

This is where things get really scary. Start adding other cost factors like increased absences, bad customer experiences, culture killer and theft and then you can begin to see the actual calculation of a bad hire.

Sullivan includes a nice list in his post of potential “weak performer costs” – it’s worth a look!

Step 6 – Determining whether weak performers can be improved quickly and inexpensively

Now you decide if you can easily improve this calculation. Generally releasing them is the best option, however if you are willing to spend valuable time training, coaching, and mentoring bad hires and employees – you might see an improvement within 6-12 months.

In the end, “when weak performers produce more than 33 percent below the average, it makes clear business sense to invest in great performance management and recruiting in order to fix or replace weak performers.” We couldn’t agree more. 

Read the full article here 

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About the Author

Adam co-founded Hireology with the mission to help growing companies make better hiring decisions through data and better technology. Adam is passionate about entrepreneurship, donating time to a number of organizations that support the entrepreneurial cause. Adam completed his undergraduate study at the University of Illinois at Urbana-Champaign, and received his MBA from DePaul University in Chicago, IL.

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