What You Need to Know About the Cost of Employee Turnover
Although most companies keep track of employee turnover, many fall short when they try to understand turnover causes and costs in a meaningful way. It can be challenging to evaluate the cost of losing employees for the first (or second, or third) time, so we’ll take you through this process step by step.
You and your team no doubt monitor spending on advertising, hardware, and workspaces, but you might not have a grasp on just how much employee turnover is costing you — which is why it’s probably costing more than you think.
Consider what the following could cost: writing and posting a job description, interviewing candidates, paying referral bonuses, having employees take on more work while a position is open, and training new hires, to name a few.
Those costs can add up shockingly fast. Do you see where we’re going?
To gain a better understanding of the factors that contribute to employee turnover, let’s take a closer look at why it costs more to replace employees than retain them.
--> Do you know how much employee turnover costs you each year? Use our free cost of turnover calculator to find out:
Why is employee turnover so expensive?
For many positions, the cost of replacing an employee is up to 150% of that role's salary—yikes. But why?
Employee turnover is so expensive because organizations pay direct exit costs when an employee leaves and incur additional costs to recruit and train new hires. Direct exit costs can include payouts for accrued vacation time and unused sick time, contributions to healthcare coverage, higher unemployment taxes, and severance pay. Side effects of turnover, such as decreased productivity, knowledge loss, and lowered morale, can incur incidental costs, as well.
Here are a few factors that contribute to the overall cost of employee turnover but are easy to overlook:
1. Recruitment costs
In their search for new hires, organizations might pay to post job listings, hire recruiters, sponsor events, establish partnerships, and offer referral bonuses. Assessment tests, background checks, and various travel expenses associated with vetting candidates can also increase costs.
Some organizations offer relocation packages, which can run anywhere between $10,000 and $20,000, depending on the company size and open position. Others include signing bonuses in their offers of employment.
Organizations take an average of 42 days to fill open positions. During that time, organizations dedicate significant time and resources to searching for new employees, an unavoidable opportunity cost that comes with asking HR and other departments to recruit, screen, and interview candidates.
Here’s the rub: recruitment costs aren’t just limited to hard costs.
2. Decreased productivity and morale
When an employee leaves, their responsibilities are absorbed, to an extent, by the employees around them, adding additional work to their already lengthy to-do lists. However, when you’re short-staffed, there will always be work that won’t get done.
Job dissatisfaction can increase when employees are tasked with additional work and longer hours, causing them to question their own reasons for staying with an organization. There's no overstating the fact that employee recognition is crucial during this period. Low employee morale can result in decreased productivity, creating a cycle that can also lead to negative changes in company culture.
In some cases, turnover can beget additional turnover, with people following their leaders to a new company or moving on because they believe they’re missing out on professional opportunities by staying put.
3. Training and onboarding costs
Once an organization has hired someone to fill an open position, that new employee needs to be oriented and trained. Employee onboarding, which includes orientation, training, and ramp-up time, can take several months.
In order to produce at the same level as the person they’re replacing, new hires have a lot to learn. They require assistance from their colleagues during the onboarding period, and that assistance has an inherent opportunity cost: every minute an employee spends training a new employee is a minute they're not producing their own work.
Now, this is not to say that time spent helping out a new hire is a waste of resources. The first few months at a new job are a crucial time for relationship-building. However, the strain on employees’ schedules can be significant, and it’s important to note that productivity might drop with the addition of a new team member before it goes up.
4. Lost institutional knowledge
Being a strong employee requires so much more than performing the particular duties of your role. Strong employees understand how their organizations function, from the people to the relationships and the culture. This kind of institutional knowledge takes time.
Depending on an exiting employee’s responsibilities and seniority, as well as the circumstances of their departure, the turnover cost related to lost institutional knowledge can exceed that employee’s annual salary. From documenting their responsibilities and processes to taking clients with them when they leave, departing employees can leave significant knowledge gaps in their wake.
Now that we’ve reviewed the types of costs associated with turnover, let’s talk about measuring and minimizing them.
Calculating your employee turnover costs
The first step towards reducing your employee turnover costs is to correctly measure those costs. We spend a lot of time thinking about how to decrease staff turnover here at Bonusly, so we built a tool to help you calculate the cost of employee turnover based on your team size, attrition rate, average annual salary, average annual productivity value, recruitment costs, and training costs.
For example, an organization with 500 employees and an average annual salary of $65,000 that loses 90 employees per year to turnover has an annual employee turnover cost of just over $3,000,000. We calculate this cost using industry averages for how much it costs to find, hire, and onboard a new employee.
Though you may be shocked by your business’ annual cost of employee turnover, take a deep breath and consider this a wake-up call. There's no need to take a glass-half-empty approach to this information. This is an opportunity to save your company a significant amount of money each and every year by focusing on improving your attrition rate.
- First, you'll need to determine why your employees are leaving. We recommend conducting exit interviews, analyzing the data, and sharing it with leadership in order to diagnose the leading causes of turnover. You can also gather feedback from your current team by conducting an employee engagement survey to better understand sentiment and avoid any surprise resignations. Some common reasons for voluntary turnover include feeling under appreciated by leadership, discouraged from trying new ideas, and ignored when giving feedback.
- Once you know why employees are leaving, you can take measures to address the problem(s) and keep your people from walking out the door. In addition to finding solutions to the issues that came up in your exit interviews and surveys, think more generally about ways you can improve employee morale, build a culture of employee recognition, and stay receptive to feedback in order to improve your current work environment.
- A critical step in reducing turnover, one that all employees appreciate and respond to, is recognition. In a study by Bersin & Associates, organizations with recognition programs that were highly effective at improving employee engagement had 31% lower voluntary turnover than those with ineffective recognition programs. As it stands, 66% of workers are likely to leave their job if they feel unappreciated.
Enabling everyone within an organization to easily reward their coworkers helps retain employees. Employee recognition platforms like Bonusly are a great option for building a strong environment of appreciation and positive feedback. These retention tools provide a structure for acknowledging the good work of others while remaining flexible enough that the types of “rewards” can be adapted to suit the needs of everyone in an organization.
When you consider what it costs to lose employees, the time, effort, and resources you can dedicate to retain them are minor in comparison. So take another look at our Cost of Employee Turnover Calculator. This time, instead of thinking about how much money you're probably losing to turnover, think about how much you can save by focusing on improving employee retention.