Whether they be related to money, time, or relationships, organizations are dealing with significant (and rising) employee turnover costs.
As many leaders are starting to recognize and address common causes of employee turnover within their workforce, it’s easy to generalize the long term impact when employees leave. This article takes a closer look at the true cost of employee turnover so you can monitor and improve your business performance and health.
What are the costs associated with employee turnover?
The total cost of turnover is always challenging to pin down because the impacts of a departing employee are far-reaching. It refers to both tangible and intangible costs that are associated with replacing a departing employee. There’s a long laundry list of factors to consider, so let’s get to it!
1. Tangible costs
Employee turnover is notorious for being expensive. You’re not only dealing with the cost of the leaving employee but also replacing them. Gallup famously shared that the cost of replacing an employee can range from half to two times the employees’ annual salary.
From resignation to the actual day of departure, managers now have to carve out time to address an often unanticipated list of admin tasks on top of their daily duties. This cost ranges from the money spent on vacation payouts, time conducting exit interviews, and involving HR, legal, and finance departments with the paperwork and procedures.
We already know that the war on talent is fierce. It’s a huge project to source a valuable candidate pool, let alone find the right person for the job. As a hiring manager, you’ll need time to align on the fitting job description, and your hiring committee then devotes a ton of time to conduct screening rounds, in-depth interviews, and reference checks.
For a job posting to be competitive, many organizations spend money on advertising vacant positions or even collaborating with a staff recruiting agency to secure the most qualified candidates. These external recruiters often ask for at least 10-20% of a new hire’s first year salary.
The most sought-after top talent may need extra enticing offers to sign on the dotted line—external hires tend to demand up to 18% more salary than internal hires. Signing bonuses and relocation packages are increasingly in demand as organizations compete for star workers. You may also look at hourly rates for software developers to be aware of what the market is currently pricing.
You’ve incurred a lot of spending for recruiting the new person; now what? You need to train them on how your company does things and help them assimilate to your organization’s culture. Leaders need to dedicate more 1:1 time to show new hires the ropes and assist them with on-the-job training. This process also extends to all the people involved with orientation meetings and the costs associated with buying new equipment and offering certification programs.
It probably took long enough for you to hire a person, but bear in mind that it still takes 2-3 months before the new member ramps up to contributing and achieving full productivity. If you’re unlucky, the newcomer might not pass probation. Or they voluntarily quit early in the job, and you’re starting the hiring process all over again.
2. Intangible losses
However, turnover isn’t just about the money! Leaders can’t afford to overlook the intangible costs that won’t surface on a budget spreadsheet. Depending on the quality of the exiting person, turnover can disrupt business activities, harm your employer brand, and create a domino effect of employees leaving in droves.
Loss of institutional knowledge and internal reputation
A strong and contributing employee performs beyond their role; they understand the specific way their organization works and the most well-received communication styles. When these individuals or senior leaders are gone, they can leave behind major gaps of knowledge. In several cases, their departure will also significantly impact established processes, erode cross-team relationships, and disrupt information flows.
Productivity and morale drop
Organizations typically experience a drop in employee morale after well-connected and influential team members say their goodbyes. On the departmental level, team dynamics shift, and people are more prone to burnout after taking over some responsibilities from the now vacant position until they’re backfilled. This can spiral into reduced productivity, especially when core group project members are no longer the glue of collaborative squads.
Quality of products and services
For highly skilled workers such as scientists and researchers, the average time to fill a vacancy can be as long as 94 days. As responsibilities get handed over or shared by the existing team, overworked employees may drastically affect the quality of work delivered. Existing customer relationships might be impacted as their contact is gone, leading to a dissatisfied or lost customer during these transitions.
Domino effect of disengagement
When organizations experience a voluntary turnover wave such as The Great Resignation, expect a sharp drop in employee engagement. Connections like workplace friendships are a factor why people stay; employees begin to question their workplaces and start to consider other opportunities as their peers leave. Add on the gossip, speculation, and even frustration—there can be some severe cultural impact when people are serially jumping ship.
Other opportunity costs
When fewer employees share the same amount of work, some things just have to give. This takes form in the lack of capacity to care for new customers, leading to restricted business expansion. Delayed deliverables, paused projects, and stagnant growth are often the result of staff shortages when positions are unfilled. Newcomers may also increase operating errors as they get up to speed and embrace steep learning curves.
What’s the average cost to replace an employee?
So as all these costs add up, how much do companies pay for filling up an empty role?
The Center for American Progress reported that the average cost of replacing an executive role for a company is 213% of that position’s annual salary. This number fluctuates depending on the role’s seniority: for example, replacing a mid-level employee can cost 20% of their pay. Filling an hourly worker job may take up to 50% of their wage.
Calculate the employee turnover costs for your business
Having a high turnover places challenging stressors on even the most robust organizations. Most organizations don’t have systems to track exit costs like interviewing, customer dissatisfaction, or admin costs.
Calculating the cost of employee turnover will shed light on your overall business performance or even identify red flags in your hiring process. While the intangible expenses may be challenging to account for, start with analyzing your cost of hiring, onboarding, learning and development (new hire ramp-up time), and the cost of that unfilled role (including lost productivity).
Say, for example, that your company has 200 people and 24 people left this year. That leaves your current turnover rate at 12%. The average salary of departing employees is $60,000. It took 37 days and $9,000 to recruit a replacement. The new employees will take an average of 50 days to ramp up to full productivity.
Recruitment cost calculation
Average cost to find new talent x number of people who departed
Cost to find new talent: $9,000 (15% of salary)
Number of employees to replace = 24
Total Recruitment cost = $9,000 x 24 people = $216,000
Training cost calculation
Average time to ramp up new employee: 50 days
50 days of ramp up time cost = $8219 per person
Total training cost = $8219 x 24 people = $197,260
Unfilled role opportunity cost calculation
Time to fill the position: 37 days
37 days of unfilled role = $6,082 per person
Total unfilled role opportunity cost = $6,082 x 24 people = $145,972
Cost of employee turnover
Recruitment costs + training costs + unfilled role opportunity cost
Total annual cost of employee turnover = $559,232
Retain your employees and reduce turnover costs
Leaving a job is always a personal matter. Perhaps a silver lining, the COVID-19 pandemic has also surfaced how much people care about the employee experience and mental wellbeing.
In a Gallup survey, 52% of voluntarily resigned employees say their departure could have been prevented if their managers addressed existing pain points. In response, organizations can pay attention to enhancing their company culture, alleviating burnout from overworking employees, and improving employee benefits. Now that you’ve evaluated your employee turnover cost, bring your people together and reduce attrition with these creative retention strategies.
Many leaders still have doubts about whether retention is still a goal worth pursuing. But there’s no time to wait—employee turnover costs are already too high for most organizations. Not only are there financial ramifications, but the loss of productivity, engagement, and institutional knowledge are also damaging to business health. An employer's ability to keep their workforces will only become more crucial as time goes on.