A scary statistic thrown around is that turnover costs an organization 1.5 to 2X an employee’s salary — and even more if that employee skews toward the senior side. But it isn’t just a corporate urban legend. Employee turnover really can be that costly, or even more so.
According to Forbes:
It costs between 30% and 50% of their annual salary to replace entry-level employees
It costs upward of 150% of their annual salary to replace mid-level employees
It costs upward of 400% of their annual salary to replace high-level or highly specialized employees
To reiterate: 400%! That can be astronomical for many companies. To figure out just how essential employee retention should be to your company strategy and goals, look into the eight hidden costs of employee turnover and how the cost of continually replacing employees can be insurmountable over the long run.
First, we can look at the clearer or more obvious costs of having to replace an employee.
1. Seeking out a replacement
Your organization may decide to pay an outside recruitment or headhunting firm. That’s a flat rate over a certain period of time you will have to absorb into your budget — even if it’s worth it to find the best employee for the empty role.
However, even if you do all recruiting in-house, your staff will be burdened and need to get paid for their work. Maybe they’ll work extra hours, or maybe your turnover rate is so high you have to invest in more human resources personnel. And if you’re a small company, this expense can quickly get out of hand. No matter how you go about it, there will always be a dollar figure attached to the work of actually finding potential job candidates.
2. Interviewing job candidates
Reading hundreds of resumes and interviewing a dozen candidates take a lot of time, and time, of course, is money. In addition to consuming your staff’s time, especially if you’re looking for senior-level, highly specialized job candidates, you will likely have to pay for airfare, transportation, and lodging for top talent to visit your offices for an interview — not to mention follow-up interviews. Costs can quickly add up.
3. Training new hires
In 2017, the Association for Talent Development found that the cost of training a single new hire averages $1,075, and it can go much higher for specialized industries or off-site seminars. And that doesn’t take into account the time a manager or peer takes from their day to assist a new hire as they get adjusted to the new systems, software, and procedures. If your employee turnover is high, that number just increases exponentially.
The first three line items in the cost of employee turnover are some of the more outright costs, but there are more hidden costs that can add up to much, much more — and they’re harder to calculate.
4. Loss of coworker morale
Nobody wants to work in a revolving door. If the cubicle next to them seems to have a different body in it every few months or every year, it can be hard for even your top performer to keep up the happy face. Employees begin to question why their company can’t keep talented individuals, and the low morale only spreads when they’re the ones stuck picking up the slack until you find a replacement. Imagine having to teach a new hire the same systems every few months just to have them leave. You can see the frustration that would build. Before long, you’ll probably be paying the turnover costs of that top performer too.
5. Drops in employee productivity
Related to the low morale is lower engagement, which means lower productivity. According to Good.co:
- Engaged employees perform 20% better than their disengaged counterparts
- Disengaged workers cost the United States $450 to $550 billion a year in lost productivity
Low morale doesn’t just lead to more turnover; it can cost you boatloads of money even if that employee sticks around. And it doesn’t even account for the cost of your employees being overworked in the wake of someone quitting.
6. Hits to your company’s reputation
Employees aren’t the only ones who hurt from turnover; your customers may start to question your stability and reputation as a company if their point of contact within your organization changes monthly from Joe to Sue to Dave to Carla. Building a strong client or customer base is about building a relationship, and that relationship will be on shaky ground if they’re always being introduced to a new face of the company.
Worse, important client needs can slip through the cracks while you’re in limbo looking for a replacement. This kind of customer experience could have a ripple effect across potential customers and clients, especially if you build a reputation of not being able to retain talent, which would cause immeasurable potential profit loss over the long haul.
7. Customer loss via employee loyalty
Maybe the employee who left your company was a star and built strong, lasting relationships with your clients. You run the risk of the clients also abandoning you when that top performer leaves you. Sure, you probably have rules in place about this, but they won’t stop this from happening entirely.
8. Lost organizational knowledge
It can take a while to become acclimated to a new company — and not just in terms of job training. A longtime employee knows that George is the contact person for IT issues and has formed a working relationship there. They know that PASSWORD2 is the default password for all internal applications. They know that Lucy leaves early on Thursdays to take her daughter to dance class, so all work should be handed in by then. This kind of “insider” company knowledge doesn’t come quickly and isn’t easy to teach. Fully infiltrating a new hire into your company requires patience and a lot of assistance from your existing staff. Meaning it costs dollars.
There are both clear and hidden costs of employee turnover, but all should make you boost the resources you put into employee retention. Because every dollar spent now could save hundreds further down the line.
Editor’s Note: This post was originally published in July 2015 and has been updated in July 2018 for freshness, accuracy, and comprehensiveness.
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