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The Real Cost of a Bad Hire

NEW YORK (TheStreet) -- It's no secret that a bad hire can cast a dark cloud over any company, creating headaches for management and stress for everyone from HR to interns. Unfortunately, the problems don't end there: The monetary cost of a bad hire can exceed 30% of the person's annual salary, according to the U.S. Department of Labor, and 39% of hiring managers surveyed by staffing firm Robert Half said that a poor hire had cost them precious hours of productivity. Even if it's tempting to make a quick decision on hiring, if the person isn't a good fit, it could be a disaster.

"The costs of bad hires include direct expenses associated with recruiting, on-boarding, training and potentially some type of severance package," says Angelo Kinicki, management professor at the W.P. Carey School of Business at Arizona State University.

Although the cost for individual failed hires will vary depending on salary and level of experience, almost one-third of U.S. employers -- 27% -- said a single bad hire can cost more than $50,000, according to a survey by CareerBuilder.com.

Unfortunately, bad hires are more common than most of us like to think, says Donna Weiss, Managing Director at CEB. Hiring managers surveyed by CEB estimate that 20% of the new hires on their team should never have been brought on. Unfortunately, the attrition of new hires is much higher than that of all employees combined. The average new hire turnover is 23%, compared with 16% for all employees, Weiss says.

"Factoring in that the average cost per hire across all levels is more than $7,000, an organization incurs more than $1.6 million in rework costs per 1,000 hires," she says.

In extreme cases, the cost of a bad hire can exceed 1.5 to two times the employee's annual salary, cautions Russ Hovendick, founder of career consultancy Directional Motivation.

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"You've got to find the perfect person to replace the one you're losing," Hovendick says. "Let's say you had a second choice when were hiring -- if that person has moved on to another opportunity, then your search will have to start all over again. If you were using an outside agency in your search, then you're going to be looking at a lot of money to advertise the position, recruit for the job and to make another hire."

Don't forget that through all that, you're also paying your full-time employees their hourly salary for the time they spend on finding someone new -- and those numbers add up quickly, Hovendick says. Even once you make a hire, more time will be spent on training, introductions and policy and procedures.

Of course some costs of a bad hire aren't always obvious -- "hidden" costs often cause even more damage than the financial ones, Kinicki says.

"The hidden costs of bad hires include lower morale, interruptions to the unit's work flow and negative perceptions about the unit, all of which negatively affect productivity and service quality," he says.

Any time a bad hire is made, there will be a "transition period" during which your employees may struggle to find normalcy in their day -- or keep up with the additional tasks they've been given.

"Our survey research shows that making a bad hire impacts the morale of the entire team," says Paul McDonald, senior executive director at staffing firm Robert Half. "Any vacancy can create additional burdens, such as losing opportunities for new business, providing lower levels of customer service and overextending current employees."

When employees have too much piled on their plate, it can bring momentum to a standstill -- especially at a startup, says Raj Sheth, CEO and co-founder of Recruiterbox.

"The real cost of a bad hire, especially to a growing company, is lost momentum," Sheth says. "Lost momentum can kill a start-up."

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When an employee leaves or is dismissed, any projects they were working on get put on the back burner or sometimes fall through entirely, Hovendick says. Not only does this hurt staff members, it can cause problems with vendor and customer relations.

"It's not uncommon for a bad hire to put the entire company on damage control in a lot of different ways," Hovendick says. "People end up trying to plug the dam rather than moving forward. They struggle to renew the trust that has been earned with clients and scramble to ensure projects get completed. Overall people feel overworked and underappreciated."

When a decrease in productivity causes deadlines and income targets to be missed, often it's the employees who stand to suffer -- and they know it.

"If the bottom line is affected, then people's salaries may be impacted -- and their bonuses definitely will," Hovendick explains. "People may start to feel resentment towards the person who is leaving -- or towards the managers who brought that person on in the first place."

Occasionally, some employees will "take sides" and be upset that the bad hire is leaving -- even if it was a bad fit culturally. Those split loyalties could complicate the situation and inspire division amongst employees who have been left at the helm.

"Be aware that saying goodbye to someone can divide team members," Hovendick says. "If half your team loves and misses the person who is gone and half of them hate the person, then it can create a very disjoined workplace -- at least for a few months. It's up to managers to communicate with their employees and make it known that the show will go on, and the company will be better for it in the end.

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