Latest / Hiring & Firing with Fexingo: Recruitment, Performance, and Workforce Decisions / The Hidden Cost of Bad Hires Beyond Salary
Transcript
- Lucas: We talk a lot on this show about how to find the right person, how to spot red flags, how to structure interviews. But I don't think we've ever properly asked: what does it actually cost you when you get it wrong? Luna: You mean the cost of a bad hire? I think most managers have a gut feeling it's painful, but I'm not sure they sit down and put a number on it. Lucas: Exactly. And the numbers are bigger than most people think. The Society for Human Resource Management — SHRM — did a study in 2025 that put the average hard cost of a bad hire at about $45,000. That's salary, recruiting fees, training time, severance. Luna: Forty-five thousand. And that's just the easy stuff to count. Lucas: Right. The soft costs — lost productivity, team morale drag, management hours spent trying to fix things — those can easily double or triple that number. One mid-size tech company I spoke with calculated that a single mis-hired sales director cost them over $300,000 when they added everything up. Luna: Three hundred thousand for one person? That's wild. How did they get to that number? Lucas: They broke it into four buckets. First, direct costs: the recruiter fee was 20 percent of the hire's first-year salary, about $30,000. Signing bonus and relocation added another $15,000. Then there was the onboarding cost — two months where the person was essentially in training, producing very little, but still drawing a full salary. That's about $40,000 in sunk cost. Luna: So we're already at $85,000 before they've really started. Lucas: Exactly. Third bucket: the opportunity cost. This sales director was supposed to open a new territory. Instead, that territory sat stagnant for nine months while the hire underperformed and eventually got let go. The company estimated they lost about $200,000 in potential deals. Luna: And that's the part most companies never track. They see the salary line, but they don't see the revenue that never came. Lucas: Fourth bucket: the management time tax. The VP of sales spent roughly 5 hours a week coaching, documenting performance issues, and eventually managing the termination. That's 180 hours over nine months. At the VP's billing rate, that's another $30,000 or so. Luna: Plus the impact on the team. When you have someone who's not pulling their weight, other people have to cover. Morale dips. Good people start looking. Lucas: And that's the fifth bucket, which this company didn't even quantify. But SHRM's study found that 70 percent of employees say a bad hire negatively affects their own productivity. So the $300,000 number might actually be conservative. Luna: Okay, so if the cost is that high, why do so many companies still rush hires? Why don't they invest more upfront? Lucas: I think part of it is that the cost of a bad hire is invisible until it's too late. You feel the pain of having an empty seat — that's immediate, tangible. The pain of a bad hire is slow and spread out over months. Luna: So it's a classic short-term versus long-term trade-off. Lucas: Exactly. And the other part is that most companies don't have a framework for calculating it. They don't track the hours, they don't estimate the lost revenue, so they never see the full picture. Luna: Let's give listeners a simple way to do this. What are the three numbers they should actually try to calculate? Lucas: Number one: total direct spend on the hire — recruiting fees, signing bonus, relocation, training cost. Add it all up. Number two: the ramp-up time — how many months before the person is fully productive, and what's the salary cost during that period? That's often 3 to 6 months. Luna: And number three? Lucas: The opportunity cost of the role not being filled effectively. If it's a revenue-generating role, that's lost sales. If it's a product role, that's delayed features. Assign a rough dollar figure to what you expected the person to deliver in their first year, then discount it by the actual performance. Luna: So the takeaway is: if you're not investing at least that much in your hiring process — better sourcing, more structured interviews, deeper reference checks — you're probably losing money. Lucas: That's exactly the argument. If a bad hire costs you $100,000, spending an extra $10,000 to get the right person is a no-brainer. Luna: I have to push back a little, though. Some of these numbers feel like they could be inflated. How do you separate the cost of a bad hire from just normal growing pains in a role? Lucas: Fair question. The key is to compare against a baseline. If your average hire reaches full productivity in 3 months, and this person took 9 months, that extra 6 months is directly attributable to the bad hire. Same with management time — if you're spending 5 hours a week on one person versus 1 hour on everyone else, that's not normal. Luna: So you need good data on your own hiring performance first. Lucas: Exactly. And that's actually a great reason to start tracking these numbers. Once you have them, you can make a much stronger case for investing in better screening, better onboarding, or even higher pay to attract stronger candidates. Luna: It also changes how you think about firing. If you know a bad hire is costing you $10,000 a month, it's easier to pull the trigger quickly instead of hoping they turn around. Lucas: Absolutely. The SHRM study found that companies that took more than 6 months to address a bad hire lost nearly twice as much as those that acted within 3 months. Speed matters. Luna: So let's say a listener wants to run this calculation for their own team. Where do they start? Lucas: Start with the easiest number: total compensation for the role for the first year, including benefits. That's your base. Then estimate the percentage of that year the person was not fully productive. If they were at 50 percent productivity for 6 months, that's 25 percent of the total comp wasted. Luna: Then add recruiting fees and any special costs. Lucas: Right. And then — this is the part most people skip — ask the manager: how much extra time did you spend on this person? Multiply that by their hourly rate. That's often a big number. Luna: I did this once for a marketing director we hired who didn't work out. The manager said he spent an extra 3 hours per week for 4 months. That alone was about $8,000. Lucas: And if you had spent that $8,000 on a better assessment upfront — say, a paid work sample or a trial project — you might have avoided the whole mess. Luna: That's the framework. And it's the kind of thing that, if it saves one bad hire, it pays for itself many times over. Lucas: If today was actually useful to you — maybe you're going to run this calculation for your own team now — the way we keep this show ad-free and focused on concrete numbers is listener support. If you'd like to help, you can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it genuinely makes a difference. We don't have sponsors, so it's just the people who listen and find value in it. Lucas: And it lets us keep drilling into data like the SHRM study instead of chasing ad-friendly topics. So thank you to anyone who does that. Luna: Alright, back to the numbers. One thing I want to ask: does the cost of a bad hire vary by role level? Lucas: Massively. The $45,000 average from SHRM covers all roles, but for senior positions it's far higher. For executives, some estimates put it at 3 to 5 times annual salary, because the strategic damage is so much greater. Luna: And for entry-level roles, it's probably lower, but the frequency might be higher. Lucas: Right. If you're hiring a lot of junior people, the cost per bad hire might be $10,000, but if you have a 30 percent mis-hire rate, that adds up fast. Luna: So the key is to calculate your own rate. If you're losing, say, 20 percent of new hires within the first year, you have a problem. Lucas: And that's a solid leading indicator. If your early turnover rate is high, you're bleeding money before you even notice. Luna: So what's one concrete step someone can take tomorrow? Lucas: Pull the last three hires that didn't work out. For each one, estimate the four cost buckets: direct spend, ramp-up waste, management time, and lost opportunity. Add them up. I guarantee the number will be bigger than you think, and it will make you rethink how you hire next time. Luna: That's a great exercise. I might do it myself. Lucas: Do it. And if you get a shocking number, share it with your team. Sometimes a good shock is exactly what you need to change your process.