The Cost of a Bad Hire

Posted by Talent Intelligence on Mon, Jan 27, 2014 @ 08:01 AM

Cost of a Bad Hire

The big news out of Silicon Valley in January 2014 was the ouster of Yahoo’s second-in-command, COO Henrique de Castro. Only 15 months after being poached from Google where he served as President of Global Media, Mobile & Platforms, de Castro was terminated by long-time colleague and Yahoo! CEO Marissa Mayer. Details of his firing are difficult to come by with de Castro keeping mum and spokespeople for the company choosing not to comment. Mayer stated in an internal memo that the decision to let de Castro go was difficult but was the best way for the company to grow. The media has been full of speculation as to what truly caused de Castro’s downfall but what could not be more clear is that his departure will cost the fledging tech giant something in the vicinity of $100 million.

Yahoo’s case is obviously unique – de Castro was among the highest paid executives in Silicon Valley, surpassing even Mayer who hired him, to the tune of nearly $3 million. The typical bad hire, even at the executive level of a company is likely to earn much less than de Castro’s $39.2 million base salary and more likely than not to receive a much more modest severance package if anything at all. Still losing an employee can trigger sticker shock as the costs – hidden, and unhidden – of replacing the bad hire begin to mount.

1-15-16_blog.jpgThere have been numerous studies detailing the costs of a bad hire and while figures vary, the consensus is that the higher in the organization they sit, the more impact their performance, departure, and replacement will have on the company’s bottom line. The factors in the cost of a bad hire can be broken down into three basic categories – termination costs, replacement costs, and intangible costs. Termination costs include expenses such as COBRA and unemployment insurance, as well as potential wrongful termination litigation. Replacement costs include the expense of outsourcing recruitment as well as travel, lodging, and meals associated with the interviewing process. Beyond that there is the expense of orientation and testing for a replacement hire. Those are the costs that are easy to quantify and they can be devastating depending upon the departing employee’s position.

The intangible costs are harder to quantify and depend largely on the circumstances of the employee’s departure. Did the bad hire lead to customer dissatisfaction or lost customers and sales? Was there a reduced quality of product or slower production as the result of the bad hire? What kind of impact did the bad hire have employee morale both while they were with the company and after their departure? These are all factors that ultimately affect the bottom line. The longer it takes to replace a departed employee, the more expensive the project will become. Remaining employees are often expected to pick up slack, potentially affecting the quality of their own output; major initiatives are shelved due to scarce resources or lack of knowledge; and every month brings a new invoice from firms assisting in replacement recruiting.

depressed-businesspeople.pngAll in all, bad hires have a seriously negative effect on productivity and profitability. The most effective way to mitigate that negative impact is by avoiding bad hires in the first place. At Talent Intelligence, we work with our clients to build talent pipelines and external succession plans, helping them avoid in two ways, the very headaches that Yahoo’s Marissa Mayer is in store for as the company works to replace the outgoing COO. By taking a proactive approach and introducing clients to select talent far in advance of hiring needs, clients are positioned to get to know prospective hires very well before bringing them into the company. This helps the client avoid cultural mismatches and allows them to take a more strategic approach to training and development of new hires. More importantly, when our clients experience a vacancy, they can hit the ground running and pull new people into the organization at record speed since they have a bench of talent that they are quite familiar with.

To learn more about the leadership risks companies face and how to mitigate their impact, check out our white paper “The Rapidly Evolving Global Workforce.”

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Topics: Leadership, Talent Pipeline

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