“Why haven’t they been fired?”  Lots of great, non-dogmatic answers in the comments.  Everyone sees a lot of deadwood, though I’m puzzled by the repeated suggestion that “The next person might be worse.”  If that’s the concern, why not just eliminate the position entirely?  Most respondents think there’s rapid employer learning combined with failure to act on that knowledge. 

Why don’t employers act on their realization that someone costs more than they worth?  Respondents mention lawsuits, non-profit incentives, and firing aversion.  A few gems:

Curt:

In my division of a large corporation, I’d say the fraction may be 20-30%.

I think they don’t get fired because:
1. Managers don’t like firing people all that much – it’s a stressful process.
2. If the people have been around awhile, and don’t do anything
particularly offensive, it’s hard to justify firing unless there’s a
severe budget cut.

[…]

5. While it’s easier to fire when there’s a management turnover, they don’t reliably know who the overpaid players really are.

D:

There are numerous people at my job who are a net loss for the
organization. I don’t mean just overpaid, but rather that any company
would be smart, if put in such a situation, to pay them to not to
work there. These people generally have both a low IQ on top of an Axis
II personality disorder (e.g., borderline personality disorder of
antisocial personality traits). But since we’re paid by taxpayers (no
competition and no bottom line), there’s not much of an incentive for
their bosses to undergo the long and difficult process (required by
union contract) of firing them. So they don’t.

Emily:

1. I work in a very small business (there are only six of us), and I
would say that the only person not being paid paid 125% or more of their
true marginal product would be our intern that is not being paid at
all.
2. They are all personally identifiable, myself included (although not the incompetent part).
3. I think that my boss has failed to fire his overpaid/ incompetent
employees because he is in denial. I don’t think he wants to admit his
current financial predicament. Handing out bi-yearly raises to his
employees is not helping his situation either. He feels attached to all
of his staff and refers to us a his only family. Frankly, I don’t think
the problem is having an overpaid staff but having an overpaid staff
while business is slow. He is suffering because he is trying to
accommodate all of his employees, while the best interest of the
business is set on the back burner.

SB‘s my favorite:

I’d guess 30%. I’d bet I can identify 60% offhand, possibly up to 75% if I really thought about it.

I am one of the bosses in a small business who makes hiring/firing
decisions. People seem more likely to cover for weak employees than
tattle. For employees I don’t observe directly, I usually hear about
issues only when their direct supervisor is about to commit hari kari.
As to why we don’t can most of the ones we know about:

1. Loyalty. The CEO has personal loyalty to some long term
stinkers. To some extent, the CEO may acknowledge the lack of value but
prize loyalty for its own sake, and I get that (kind of). But people
also don’t really see the failings they have become used to in
long-termers.

2. Customer familiarity…

3. Neoptism. Before I came on board some hiring of the children of good employees happened, with predictable results.

4. Legal headaches. We were sued for religious discrimination by the
employee we fired for trying to beat up another employee in the parking
lot “to defend Jesus” and for racial discrimination for firing an
employee who was stealing cash and inventory by forging customers
signatures for purchases and returns (hint: that leaves a paper trail)… Don’t get me started on the delicacies of dealing
with habitual workers comp filers, or employees with medical problems
that make them unreliable.

5. Unemployment insurance. You can’t really fire someone for being
ZMP and call it “for cause.” (Well, you can try, but the argument has
to be … carefully crafted.) So, you have to continue to pay for the
privilege of canning them. Since the wage/value ratio is why you are
firing them, this can mess it up.

[…]

8. No one wants to be a s#*+. More relevant in a small business like
this (in a large company I’d imagine managerial ignorance is a bigger
factor), but, hey, it sucks to fire people, even people who need firing.

Over all, firing people is a last resort. In all honesty we try to
get them to quit, or we just reduce their hours to the point that their
impact on the business is minimized.

As a couple of comments note, the financial and psychological costs of firing people if they don’t work out makes signaling important even when there’s rapid employer learning.  By the time you know hiring a person was a mistake, you already feel sorry for him.