The Real Cost of Employee Turnover

Businesses know the cost of turnover is expensive.  How about its extent? The cost of recruiting, hiring, and training new employees is clear, but the hidden costs of lost productivity, knowledge, and opportunities are often overlooked.

The cost of turnover hits 100-200% of an employee’s annual salary. Once a company factors in the soft costs, the final tally is jaw-dropping. Companies must wake up and smell the cost of turnover burning through their bottom lines. The cost of turnover is slashing profits in a big way.

What Is Employee Turnover?

Employee turnover gauges the rate at which employees leave the company and require replacement by new hires. Employee turnover can be for any reason such as better opportunities elsewhere, retirement, or termination.

Employee turnover has two main types: voluntary and involuntary. Voluntary turnover is when an employee chooses to leave the company. Involuntary turnover is when the company terminates an employee.

Why Do Employees Quit?

Employees leave their jobs for avoidable reasons. Three of the top reasons are lack of growth opportunities, poor work-life balance, and low pay. These top drivers contribute to the cost of turnover.

Lack of career growth is a major reason for employee turnover. Lacking skill development and growth opportunities makes work feel stagnant and pointless.

Balancing work and personal life are crucial for well-being and job satisfaction. Employees who work long hours and forgo paid time off often experience burnout. Burnout often results in employees becoming disillusioned and leaving.

Inadequate compensation is a straightforward reason for employee turnover. Employees want fair and competitive compensation. Those who feel undervalued will search for high-paying jobs, especially if they have in-demand skills.

The Hidden Cost of Turnover

Calculating the cost of turnover requires looking beyond the costs of recruiting and training a replacement. The cost of turnover goes far beyond the direct expenses of recruitment and onboarding. There are many hidden costs that often end up costing companies more.

Businesses often underestimate the cost of turnover on productivity and company culture. Evaluating the impact of knowledge and relationship loss is challenging. The cost of turnover extends to customer service and client relationships. Employee turnover disrupts the familiarity and consistency valued by existing customers. With new hires, clients must start from scratch building that rapport and confidence in the company. The cost of turnover also affects company culture. High employee turnover creates instability and insecurity, damaging morale. Employees may become distrustful or disengaged. Talented workers may look for greener pastures where they feel more valued and secure.

Another cost of turnover is productivity loss. When an employee leaves, their work still needs to be complete. Teammates often must pick up the slack, which lowers productivity and morale. The hiring process also requires other employees to invest time in interviewing, screening, and training the new hire.

Loss of knowledge is also a major contributor to the cost of turnover. Experienced employees take years to grasp processes, clients, products, and company culture. When they leave, all that knowledge and expertise leaves with them. Employee turnover causes delays and inefficiencies as the new hires must start from scratch to build up that knowledge base.

The direct cost of turnover is measurable, but the hidden cost can reach 50-200% of an employee’s salary. Companies must dig deeper into it.  Enhancing work environment, compensation, and growth opportunities reduces employee turnover, leading to increased productivity and satisfaction.

Calculating the Cost of Turnover

Calculating the cost of turnover involves considering various direct and indirect expenses. Here is the breakdown of the key components to include:

1. Separation costs
2. Recruitment costs
3. Selection costs
4. Onboarding costs
5. Lost productivity
6. Learning curve
7. Cultural impact
8. Customer impact
9. Knowledge loss
10. Exit administration

To calculate the total cost of turnover, add up all these components. The formula looks like this:

Total Cost of Turnover = Separation Costs + Recruitment Costs + Selection Costs + Onboarding Costs + Lost Productivity Costs + Learning Curve Costs + Cultural Impact Costs + Customer Impact Costs + Knowledge Loss Costs + Exit Administration Costs

Actual cost of turnover varies based on factors like industry, job role, location, and company size. Regularly calculating the cost of turnover helps companies identify areas for improvement and reduce employee turnover.

Strategies to Reduce the Cost of Turnover

Strategies to reduce the cost of turnover, include:

• Investing in Employee Engagement

  Engaged employees tend to stay longer. Conduct surveys and exit interviews to better understand what motivates and frustrates them. Make changes to address their feedback, such as improving work conditions or enhancing employee benefits.

• Offering Competitive Compensation

  One of the top reasons for employee turnover is lack of adequate pay or benefits. Review the compensation packages to ensure they are fair and comparable to industry standards. Consider adjusting salaries or improving benefits and incentives to retain top talent.

• Improving Hiring Process

  A poor hiring process often leads to hiring mismatches, resulting in employee turnover. Refine recruiting methods to attract top talent who will thrive in the company. Use structured interviews, skills assessments, background checks and references to find the best fit.

• Training and Development

  Employees seeking challenges and growth are less likely to leave. Provide training to develop their skills and advance their careers. Leadership programs nurture and retain top employees.

• Foster a Supportive Company Culture

  Work environment and relationships impact employee turnover rates. Promote a culture where employees feel appreciated and supported. Team building, recognition, flexibility, and open communication help build a positive company culture.