Just how costly is a bad hire? It depends on who you ask. If you were to Google “cost of a bad hire,” you’d find percentages, arguments, and even calculators promising to show you the “true cost of a bad hire” while offering little insight beyond the fact that they cost more than the worker's salary and turnover.
As a result, the discussion on the direct and indirect costs of bad hires has become somewhat obscured. Some sources cite the “astronomical costs” of an unfortunate appointment while offering few measurable impacts, while others claim that a bad hire costs $240,000 while citing outdated and unavailable sources. Still others offer interactive tools without including details on their calculations.
The problem is that none of these sources tell you how often you’re making a bad hire, making it hard to know how these figures apply to your company. They often don’t tell you how the calculations are made or where the numbers come from, making it impossible to say whether the issue is of genuine business concern. When it comes down to it, they offer vague ideas about how to definitively avoid paying the costs of a bad hire. All of this has led HR to rely on "hope for the best" approaches to personnel management, with no clear insight into their hiring risk or effective actions they can take to manage it.
Bad hires cost a lot—but more concerning than the occasional rushed hire is a particular breed of “bad hire” which gets into organizations more often and does even more damage. In the last few years, we’ve seen a rise in the appearance of “the toxic employee” which is far more dangerous to businesses than a mere skill or cultural mismatch. While “bad hires” fail to get the work done, toxic workers can often survive in an organization while deliberately harming its property and people. Though they often meet company quota, their demonstrations of sexual harassment, bigotry, fraud and other violations of company policy can ravage the bottom line.
In the face of toxic behavior, the temptation is to try and solve the problem by hiring a top performer to make up for it. But new research shows that the cost of losing a good hire is twice the cost of firing a bad hire, and not hiring a toxic worker adds over twice as much to the bottom line as hiring a superstar. Moreover, when toxic behavior is present, good employees are 54% more likely to leave and 5% of your overall employee base will actually do so.
How much are toxic hires costing your organization? Relative to hiring a standard, non-toxic worker, a single toxic employee on a team of 20 will cost $25,600 per year due to increased voluntary turnover and absenteeism alone. This means that a company of 1,000 employees is losing at least $1.2 million to toxic workers each year.
How We Calculated $1.2 Million Per 1,000 Employees
First, we calculated the cost of voluntary employee turnover: According to a breakthrough study by Cornerstone OnDemand, good hires will leave their companies when toxic employees comprise even 1/20th of a team. We set this toxicity ratio as our threshold for voluntary turnover. At this threshold, toxic workers cost $8,800 more than an average hire over the span of half a year, which means that allowing a toxic worker to stay for one year costs $17,600 in voluntary turnover alone.
Then, we estimated the rate of toxic hiring in a 1,000 person enterprise: In the same study, nearly 5% of employees in a sample of over 63,000 met the criteria for being terminated as a toxic employee. This means that in a company of 1,000 people, about 5% or 50 employees can be expected to display toxic behavior which leads to firing and replacement. When multiplying the annual cost of a toxic employee on a team of 20 people ($17,600) and multiplying this by 50 workers in an organization of 1,000, we find that a company with 1,000 employees loses at least $880,000 per year.
Finally, we calculated the cost of bullying-based absenteeism: We found that absenteeism costs $2,650 per salaried employee per year over payroll alone. Given that bullying accounts for 10-20% of stress-related absenteeism on a national scale, bullying costs a median of $400 per employee per year. Thus, for a company of 1,000, bullying related absenteeism will cost $400,000 annually. Add this to the $880,000 lost to voluntary turnover and we find that a company with 1,000 employees will lose at least $1.2 million on voluntary turnover and absenteeism alone.
By all accounts, this is a conservative estimate. In addition to the $1.2 million lost, companies who house toxic workers will pay replacement costs for the new employee which amounts to about $15,000. They also pay for losses to team performance, impact on employee morale, lost sales and customer accounts, legal fees, insider threats, toxicity-related health & medical expenses, steep drops in productivity, and and reputational losses across the board—all of which are a drag on the bottom line.
The occasional “bad hire” can cost your company a few thousand dollars, but don’t make the mistake of not screening for the toxic behaviors that can sink your company. The reality is becoming clearer and clearer: toxic behavior is more common than ever, and you can't risk hiring a toxic employee.