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How Much Can Employee Turnover Cost Your Company?

Tuesday, March 22, 2022

How Much Can Employee Turnover Cost Your Company?

The cost of replacing employees isn't just financial. Many companies fail to recognize that finding, training, and onboarding new employees don't just take up the time of HR professionals, but that of other employees as well. More importantly, having a high turnover rate also affects company culture, employee productivity, and morale, all of which are detrimental to the future of a business and can impact the company's bottom line.

According to the Bureau of Labor Statistics, roughly 3.8% of workers leave their organization monthly [1]. That's a lot of added costs for HR to work into the company budget. Between the cost of employee turnover and the cost of onboarding new staff, the numbers can become increasingly high.

However, despite the fact that the direct and indirect costs of losing staff are often some of the largest avoidable costs for any workplace, many do very little to actually avoid that cost by improving their company practices. In this article, we will outline the cost of replacing an employee, the impact of poor retention level, and employee retention strategies you can do to reduce staff turnover.

What Is the Cost of Replacing an Employee?

Unfortunately, with so many hidden and untracked costs involved, it's difficult to pinpoint an exact figure for how much employee turnover costs in a financial sense. But, just looking at both outgoing costs and expenses for incoming new hires makes it easy to see that replacement costs are high.

‍According to the Society for Human Resource Management (SHRM), it's estimated that for every salaried employee you replace, it costs an average of six to nine months of the salary [2] to find and onboard a new employee. However, this can also vary depending on employee seniority and role in addition to their salary. Croner estimates that while it costs an average of $15,000 to replace an employee, it can cost anywhere from $50,000 to $130,000 if that employee is a senior staff member [3].

‍That includes separation costs like severance pay (as needed), payments for unused sick leaves and accrued vacation time, healthcare coverage costs and other benefits package costs, and more. Pair all of this with additional time required for exit interviews, recruiting, and onboarding new hires and the replacement costs for employees can add up. ‍ ‍

If you want to have a rough estimate of the true cost of employee turnover, there is a tool that could help you calculate how much turnovers would cost you based on the size of your team, attrition rate, average productivity rate, hiring cost, training costs and average annual salary.

Why Is the Cost of Replacing an Employee so High?

When you have to replace an employee, whether that's through a "voluntary turnover," involuntary turnover or termination, there is a wide range of costs involved and not all of these are just the cost of the turnover but also the cost of replacing them and onboarding new talent.

‍Here are some of the costs associated with replacing an employee:

- Recruitment costs are often the largest expense. Businesses that utilize a recruitment agency, will typically need to pay the agency 10-20% of the employee's annual salary if they hire a candidate the agency puts forward. Agencies are sometimes required though as the labor market is saturated and finding quality candidates isn't always easy making more companies willing to pay recruiter fees.

- Interviews also come at a cost. According to Oxford Economics, each interview costs an estimated $1,300, which covers the salary costs of all employees involved in the interview process. This includes both recruitment interviews and exit interviews.

- Onboarding Cost, usually takes an average of four hours, but in some of the senior staff cases, can require a full working day depending on the job description. This means that businesses will be paying at least two employees to perform duties outside of their job roles for any given time frame.

- Training Cost, whether done in-house or externally, comes at a cost. This is especially true for specialized positions that require niche skills. Bersin estimates that the average company spends $1,400 per employee [4] on training costs.

- Lost Productivity costs at least $1.8 trillion per year, according to a report[5]. Similarly, low engagement also costs the global economy over $8 trillion. [6]

- Institutional Knowledge. An employee is more than a worker. To become an effective employee, they must understand how the organization functions, from the people to the relationship. Losing an employee means you have also lost someone with valuable institutional knowledge.

‍At the end of the day, each team member is an investment that amounts to more than just the employee's annual salary. Each represents money invested in pre-boarding and onboarding processes and training and development throughout their career. High employee turnover means businesses are losing this investment.

‍How to Reduce Employee Turnover Costs

The simplest way to reduce employee turnover costs is to address why employees are leaving your company. Whether it's because you're not hiring the right people for your vacancies, or your company isn't taking care of its people, you must address employee morale as the first step in reducing employee turnover. After all, leaks have to always be stopped at their source.

‍In another study from SHRM [7], it was found that companies that used a pre-boarding program were 11% more likely to retain employees after their first year of employment. It's for this reason that many companies are beginning to implement pre-boarding programs and strengthened onboarding to engage employees from the moment they accept a job offer and their very first day at work.

‍SHRM also found that 90% of employees decide whether to remain with a company within the first six months of their employment. Tools like 90-day reviews, work anniversary recognitions, employee recognition program, ample opportunities for training and career development, and other benefits are extremely valuable in helping new employees decide to stay in those crucial six months and reducing turnover rates.

‍Another study found that a large portion of the turnover rate was because of bad management [8], In this study, 41% of the employees who left because of a bad boss did so because they weren't recognized for their work. Many experts have testified that UK managers typically don't receive training in how to manage their employees, so your company must implement a program that ensures that every manager is trained before they are given responsibility for other employees. Good leadership is an integral part of reducing turnover.

‍According to OWL Labs, companies that offer remote working opportunities and flexibility have a 25% lower turnover rate [9]. With newer generations of employees demanding more flexibility in their working hours, offering remote working is a great way to show employees you value their time and trust their commitment to work output.

‍Remote workers tend to report that they're happier than on-site employees [10], which shows that giving employees the flexibility to avoid commutes and work on their own schedule improves employee morale and ultimately improves employee retention.

In summary, here are factors you should consider addressing to reduce the number of departing employees:

  • Employee's salary / Competitive pay
  • Improving employee engagement
  • Leadership development
  • Team morale
  • Flexible work schedules

‍Employee Retention Matters ‍

At the end of the day, high turnover rates negatively impact businesses. It harms morale, continuity, and profitability. It can also lead to lost productivity. These can be mitigated with the right mindset and focus on key areas of the organization. Businesses that can keep boost their retention stand to gain so much more in the long run.

‍Whether your employees are working on-site or remotely, there is a tremendous amount of independent research that proves that investing in good onboarding and continued engagement of employees has a positive impact on the success of a company. This can be measured in employee retention, employee satisfaction with the culture and even in the company's revenue, so it pays off to get this right!  

Looking for an onboarding and engagement solution to reduce the cost of losing employees? Qualee can help you to improve your retention rates. Try the Starter Plan today!

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