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The True Cost of Employee Turnover

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Can you calculate the annual cost of your organization’s employee turnover?  We have found most small to medium-sized companies (SMBs) do not track or analyze their cost of employee turnover. Most simply assume it’s just a cost of doing business. While it is a little difficult if you don’t have all the data points, we have provided a few easy ways to help you calculate the cost of your employee turnover in this article.

When you discover your direct and indirect costs that accompany turnover (good or bad) it could change your mind about employee retention strategies. Improving employee engagement is a LOT easier and less expensive than you may have first thought.

In today’s competitive business world, companies need to attract and retain talent to survive and thrive.  Turnover places a drain on profits for SMBs – which creates a drain on the national economy. At enormous costs, it’s worth noting The Bureau of National Affairs estimates U.S. businesses lose $11 billion annually due to employee turnover.1 

Some studies like the Society for Human Resource Management (SHRM) predicts that every time a business replaces a salaried employee, it costs 6 to 9 months’ salary on average. For a manager making $40,000 a year, that's $20,000 to $30,000 in recruiting and training expenses.

Thirty case studies taken from the 11 most-relevant research papers on the cost of employee turnover demonstrate that it costs businesses from a low of about one-fifth of a worker’s salary up to 2x the annual salary to replace that worker. For businesses that experience high levels of turnover, this can add up to represent significant costs that can potentially be avoided.2

Here are the replacement costs for some traditional positions and job titles.

  • An $8 per hour employee $3,500
  • An $80K salaried manager $70,000
  • Grocery store manager $34,735
  • Hotel front-office $5,688 to $5,965
  • Hourly store personnel $4,291 to $3,372
  • Registered nurses $23,487
  • Administrative assistants or managers $10,031
  • School teacher $4,366 to $17,872
  • Call-center employees $21,551
  • Lower-level executive at a consumer products company (making $125k), $185,000

This all-inclusive list has several direct and indirect costs that are often over looked and not included:3

  • Direct cost of employee replacement
    • Pre-departure disengagement: loss of productivity and possible clients
    • Lost productivity of manager and co-workers
    • Cost of overtime
    • Advertising
    • Lost training and re-training (10-20% of annual salary over time)
    • Interviewing
    • Drug Testing and Background Checks
    • Onboarding
    • Lost opportunity cost of the hiring staff not doing something else 
    • Recruiter fees
    • Lower productivity of new recruit for up to 1 year
    • Possible increase in the cost of employee benefits
  • Indirect costs and risks associated with employee turnover
    • The risk of hiring the wrong person – again
    • Lower productivity with remaining staff
    • Lower team morale
    • The spread of fear, doubt and disengagement
    • Remaining staff can become overworked, angry and resentful
    • Absenteeism and sick days are contagious for the disengaged
    • Rookies make product and service mistakes that cost money
    • Rookies make product and service mistakes that lose customers
    • Mistakes can raise insurance rates
    • Losing customers increases the cost to find new customers
    • Loyal customers notice change
    • Losing customers is contagious
    • Loss of institutional knowledge can be costly and dangerous
      • Security
      • Client and Vendor Relationships
      • Reputation
    • Social media rants are not always customers
    • Loss of Word-of-Mouth referrals is contagious
    • Loss of reputation starts with disengaged employees

Calculate Your Cost of Employee Turnover

Finding an automated calculator to “Calculate Your Cost of Employee Turnover” is Google-ishly easy. For example, the Society for Human Resource Management has a worksheet.  The Association for Talent Development has and several private companies have fill-in the box calculators.4

What’s the Impact?

A bad hire costs a company 5 times an annual salary to replace them and it can take up to 32 weeks for a new hire to become proficient in their job. Based on data from LinkedIn, if a company with 10,000 employees reduces its turnover by a mere 1%, it would be able to save about $7.5 million each year. 5 

A recent study published in Personnel Psychology advised that the top 5% of the workforce produces 26% of the firm’s total output — but often this is the sector of the workforce that’s paid the least. There is potential that this is contributing to higher than average turnover rates across the nation’s companies.6

Regardless of where you draw the line on direct and indirect costs - employee turnover is expensive.  Losing top performing talent can have long lasting economic impact on SMBs. 

Reduce Employee Turnover with Employee Engagement Strategies

Reducing the cost of employee turnover and improving retention rates starts with the right employee engagement strategy.  Not every company can afford the high-cost event-based Google-like beach volleyball, nap room and all the Red Bull you can drink strategy. Our experience and data show that improving individual, team and overall business performance is the ultimate reward for all involved – including the client.
 

Footnotes:

1 Source: Victor Lipman, Contributor, Why Are So Many Employees Disengaged? Forbes Magazine, January 18, 2014, http://www.forbes.com/sites/victorlipman/2013/01/18/why-are-so-many-employees-disengaged/

2 Heather Boushey and Sarah Jane Glynn, There Are Significant Business Costs to Replacing Employees, Center for American Progress, November 16, 2012, https://www.americanprogress.org/wp-content/uploads/2012/11/CostofTurnover.pdf

3 Source: Evolve Performance Group, Inc. Magazine, http://www.inc.com/suzanne-lucas/why-employee-turnover-is-so-costly.html, Wall Street Journal, http://guides.wsj.com/management/recruiting-hiring-and-firing/how-to-reduce-employee-turnover/, Josh Bersin, Principal and Founder, Bersin by Deloitte, Employee Retention Now a Big Issue: Why the Tide has Turned, Published on August 16, 2013, Featured in: Recruiting & Hiring.

4 Source: Society for Human Resource Management, https://www.shrm.org/resourcesandtools/tools-and-samples/hr-forms/pages/1cms_011163.aspx

5 Tess Taylor, Business can feel harsh impact when 'high potential' employees leave, HRDrive, September 1, 2016

6 Ernest O'Boyle and Herman Aguinis, The Best and the Rest: Revisiting the Norm of Normality of Individual Performance, Personnel Psychology, Volume 65, Issue 1, Spring 2012

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