What are the true costs for a wrong hire – and how to avoid wrong hires for your company?

What is a “wrong hire”?

A wrong hire occurs when a new employee is not a good fit for the position, the team or the company – or alternatively leaves the employer during the first 6 months of service. Often a wrong hire could be due to professional reasons, such as a lack of qualifications / experience, or interpersonal factors, such as an inability to teamwork well with others or an overall lack of performance and cultural fit. Synonyms for a wrong hire include a hiring mistake, mis hire, poor personnel selection, poor performer or an unsuitable hire – terms that all point to the same problems – reasons, cost or a loss of productivity.

Hiring mistakes don’t happen by chance – in most cases, they result from structural weaknesses in the recruiting process or often decision makers involved. If we look further into hiring process details and root/cause analysis, the list of hiring mistakes becomes often endless. 

These are the six most common causes for bad hires, that cost companies a lot:

• Flawed selection processes
• Time pressure during recruitment
• Unclear or faded job requirements
• Unskilled assessors & interviewers
• Lack of cultural fit & leadership style
• Inadequate onboarding & assimilation

If we look into our 25+ years of executive recruitment consultancy experience in Germany and global countries, the most underestimated cause of wrong hires are often cultural leadership aspects and unskilled decision-makers. Thus – it is our constant ambition to train-up assessment and decision-making skills of our clients – when critical new hires are at stake. 

Direct, Indirect & Hidden Cost of Hiring

Everything has a price – and in Western companies prices add up to cost. This truism also applies to your HR activities and processes. Some HR costs are obvious, but hidden or harder-to-quantify costs. Other cost is often categorized in organizational performance and productivity cost – means having a serious impact to the companies´bottom line.

Let´s have a quick look into direct recruitment costs – acquainted to a new hired person:

1. Direct Cost – often HR-related:

• Technical recruiting costs: job postings, recruitment channels, job panels, social media, hiring events
• Resources involved: internal HR resources, internal functional/biz-leaders, external recruitment consultants, quality time for screening & skill assessment spent until hiring
• Costs until start of employment: background checks, referral bonuses, relocation support, additional administration costs etc.When we broaden this first common view of direct hiring cost, we will expand the invested timeline of the hire into the probationary period (typically 6 months in Germany), means the indirect cost after the start of the new hire:

2. Indirect Cost – during Onboarding:

• Onboarding time spent with direct & indirect colleagues, onboarding programs
• Time with integrators (HR, IT, Finance, Legal) and the new hire
• Workplace tools, workplace equipment etc.
• Technical & functional training sessions, on the job-trainings
• Salary & payroll payments; contributions to social security systemsOnce there is appearing doubt on the quality of new hires during the first couple of months tenure, a new hire might either turn into a performance hire or a wrong hire – after thorough performance evaluation of key decision makers of your company. In these 3-5 % of negative cases, wrong hires cause hidden recruitment cost below the radar. We count this third hidden cost category as subprocess of the entire recruitment process.

3. Hidden Cost that hurt – in case a new hire becomes a wrong hire:

• Quality time for evaluating the new hires performance: functional leader / HR / teams involved – tasks are performed poorly – or?
• Consulting time for exiting the wrong hire: functional leader / HR / legal?
• Termination cost & severance pay
• Missed biz-opportunities (e.g. Sales, Service etc) and loss of external/internal reputation
• Cash-flow losses or strain
• Team demotivation: wrong hires can strain teams and drive away top performers
• Re-start of a completely new hire process

Means overall – the total cost of a wrong hire becomes particularly expensive when:

• key positions are affected (e.g., Executives, Sales, IT, Expats)
• more or multiple hierarchy levels are involved – domino effect
• temporary pain of working shorthanded is counted
• the wrong hire remains undetected for a longer time
• employment protection laws or labor law proceedings come into play.

To give you a conservative snapshot of the “total cost of a wrong hire”, let´s roughly use three hiring levels and their salary-levels as examples:

• Specialist: ~ € 60.000 – 80.000
• Middle Manager (Team-Lead; Department-Head): ~ € 100.000 – 140.000
• Top Manager (Division-Lead, VP, MD): ~ € 180.000 to € 220.000, or higher

By using even moderate cost calculations, the overview of total cost (first 6 months tenure) associated with a wrong  hire may look like this:

According to the Federal Association of German Management Consultants (BDU), a wrong hire could easily cost more than two years’ salary, even when detected in the first 6 months of service. There might be significantly higher cost involved for any wrong hire, when the “unsuitable hire” remains with the company for an extended period and is not replaced until much later. Then – total cost become a critical value for any company, and the investments into this wrong hire becomes obvious by high fluctuation rates or disconnects within the team.

We could share by personal experience, that the impact of total cost for wrong hires have a much more severe impact to small-to-medium companies, in comparison to larger companies or corporates. Groups could easier absorb these wrong hire cost, due to the smaller occurrence in comparison to a bigger headcount. However – any wrong hire cost remains being a significant loss for any employer, independent of the size of your company.   

How to avoid hiring the wrong person

When it comes to hiring employees, there is no single metric for recruitment success. Even though all parties involved typically pay enormous attention to hiring costs, we have to consider other process factors like:

• Time to fill a vacancy
• Time for skill assessment
• Assessment quality of skills
• Resources required to hire
• Ratio of applications to job offers
• Ratio of job offers to job acceptances
• Performance evaluation metrics, during onboarding process

If we focus solely on the money you spend, it could seriously compromise the quality of the process. If you invest less in hiring, it will almost certainly have a negative impact on the quality of your workforce, with critical consequences for your team, organization and employer brand.

The right measures and skills can effectively reduce the number of bad hires. The key lies in a comprehensive and professional selection process that looks beyond the resume. It’s not just about qualifications, but also about motivation, values, and long-term prospects. Here are five concrete steps you can take to reduce the risk of hiring the wrong person:

• Create precise & actual job profiles
• Conduct competency-based interviews
• Utilize skill assessment tools and potential analyses
• Pay attention to cultural fit & leadership behavior 
• Incorporate external expertise through recruitment consultants

In our view – the underestimated Key to Success is to Working with Professional Recruitment Consultants. They not only bring market knowledge and networks to the table, but also have proven methods and significant experience for evaluating candidates of multiple levels across industries and countries. They can make the decisive difference, particularly for hard-to-fill or strategically important leadership positions. The investment in a professional recruitment process usually pays for itself in a short time – through improved performance, lower turnover and better cultural fit. 

Conclusions for avoiding wrong hires:

1. Minimize the risk of a wrong hire

   Hiring mistakes often come from simplistic and avoidable errors in the recruitment process, leading to high cost and weak productivity with your company over time. Investing thorough time and resources in a professional hiring process today clearly saves you more money tomorrow.

2. Invest in quality hires

   Do not see the hiring process as purely monetary metric or superficial exercise. It is extremely important for HR teams and biz-leaders to consider the quality of every new hire as key driver of a broader productivity gain, not as a cost-optimization only.

3. Hiring leaders are CRITICAL

   Leaders are the multipliers of team performance, productivity gains and good work atmosphere. Companies that recruit strategically and rely on professional support not only secure the right talent but also ensure long-term business success. Wrong hires are expensive – professional consulting services are priceless.

Written by Marc Steuer CFR Global Executive Search
Photo source: Pixabay