The Hidden Cost of Employee Turnover

A magnifying glass hovers over a dollar sign.

Employee turnover is expensive, affects business performance and can become increasingly difficult to manage, says the Society for Human Resource Management (SHRM). Unfortunately, some companies are unaware of the true cost of employee turnover. They “may inadvertently plant the seeds” for losing top-performing employees or those with in-demand skills.

This ignorance can lead to an expensive and long-lasting problem. A meta-analysis of more than 300,000 organizations and units found that “the relationship between total turnover rates and organizational performance is significant and negative,” according to the Journal of Applied Psychology. “Organizations must recognize that when turnover rates rise, their workforce and financial performance are at risk. They should search for strategies to mitigate and eliminate turnover, recognizing that lower turnover is always better.”

Chart depicting 2015 turnover rates by industry.

Industry-specific stats can help companies gauge their turnover rate. The average employee turnover rate for all U.S. industries is 16.7 percent, according to CompData’s 2015 Benchmark Pro Survey.

Cost of Employee Turnover

Financial Estimates

Direct replacement costs can reach as high as 50 to 60 percent of an employee’s annual salary, and total costs associated with turnover range from 90 to 200 percent of annual salary, SHRM reports. A separate study from SHRM found that employers spend the equivalent of six to nine months of an employee’s salary to find and train a replacement.

The total cost to replace an employee earning $8 per hour is $3,500, and this figure is “the lowest of 17 nationally respected organizations that calculated such costs,” Inc. reports. Estimates from multiple sources show the total cost of replacing employees at various levels.

  • Entry-level employees cost 30 to 50 percent of their annual salary to replace.
  • Middle-level employees cost 150 percent of their annual salary to replace.
  • Specialized or high-level employees cost up to 400 percent of their annual salary to replace.
Graphic illustrating the cost of replacing employees at various levels.

The higher a company’s turnover rate, the higher the cost of turnover, PricewaterhouseCoopers says. Turnover-related costs represent more than 12 percent of pre-tax income at companies with an average turnover rate. But for companies in the 75th percentile for turnover rate, costs equal nearly 40 percent of their earnings.

Determining the “Real” Cost

Companies tend to underestimate what turnover costs. Calculating the total cost of losing an employee involves several factors, says Josh Bersin, founder of Bersin by Deloitte, on LinkedIn.

 

  • Direct costs of hiring a new person, including advertising, interviewing, screening and hiring.
  • Costs of onboarding a new person, including training and management time.
  • Lost productivity. A new person can take one to two years to reach the productivity of an existing person.
  • Lost engagement. High turnover can cause other employees to notice, decreasing their productivity.
  • Industry-specific errors and loss of customer service. In healthcare, this can include higher error rates, illness and other expensive costs not seen by HR.
  • Training costs of the departing employee, which can amount to 10 to 20 percent of an employee’s salary over two or three years.
  • Cultural impact. When employees leave, “others take time to ask ‘why?’” Bersin writes.
Graph depicting the cost to value of an employee.

However, the most significant part of turnover is that a company loses an “appreciating asset,” which refers to the organization’s return the longer an employee stays. “The longer we stay with an organization the more productive we get,” he says. “We learn the systems, we learn the products, and we learn how to work together.”

Employee Retention Strategies

Creating employee retention strategies can build morale and loyalty with employees. This includes elements in new hire orientation, corporate culture, employee communication and teamwork, according to staffing company Robert Half.

The top 10 retention initiatives in use include the following, SHRM reports.

  • Market adjustment (62 percent)
  • Hiring bonus (60 percent)
  • Work environment, such as flexible schedules and telecommuting (49 percent)
  • Retention bonus (28 percent)
  • Promotion and career development opportunities (27 percent)
  • Above-market pay (24 percent)
  • Special training and educational opportunities (22 percent)
  • Individual spot bonuses (22 percent)
  • Stock programs (19 percent)
  • Project milestone/completion bonuses (15 percent)

The average raise that an employee can expect is 3 percent, according to Forbes contributor Cameron Keng. However, if an employee leaves a company, that employee can look forward to a 10 to 20 percent increase in salary. “Why are people who jump ship rewarded, when loyal employees are punished for their dedication?” Keng asks. He points to the recession and how it allowed businesses to freeze their payroll and decrease salaries of new hires. Yet, these reactions were meant to be temporary.

Graphic with the following quotation, "The average raise that an employee can expect is 3 percent. However, if an employee leaves a company, that employee can look forward to a 10 to 20% increase in salary."

In the past, 5 percent was the average annual pay increase. Companies would be better off offering a 5 percent raise instead of letting an employee walk, Suzanne Lucas of CBS gives as an example. Otherwise, the company absorbs a more significant portion of the employee’s salary in turnover costs. Companies that take raises and other compensation matters more seriously will fare better with turnover issues.

Creating a successful telecommuting policy can help retain employees. Most employees would like to work from home at least part time, says Forbes contributor Mike Kappel. Working from home provides employees with greater work-life balance and job satisfaction, and they reduce their time and costs associated with commuting. Employers benefit by saving on office space and enjoying increased worker productivity, according to Harvard Business Review. The appeal and increase of work from home arrangements make this a powerful retention (and hiring) strategy for employers.

Retaining Strong Employees

Managers and other business leaders can learn effective strategies to enhance employee engagement and productivity. From supporting strong HR policies to developing clear communication strategies and a positive work culture, leaders can take the right steps to minimize turnover and help employees thrive.

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