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Estimating the Costs of Employee Turnover

 

Controlling the rate of employee turnover may take some time. But when you apply a conscious effort to understand the cost of employee turnover, why workers leave and what you can do to retain them, you may notice areas where you can improve your business. Your employees help make your company a great place to do business, and reducing turnover begins during the hiring process. Review this information to more successfully manage the cost of replacing employees.

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Employee turnover costs

According to Gallup’s 2023 State of the Global Workplace survey, 51% of employed workers are actively or passively job seeking. Another of the organization’s surveys states it costs between one-half and twice an employee’s annual salary to replace them. This means turnover has the potential to cost your company far too much.

While it’s easy to quantify some turnover costs, calculating the total amount is tricky. Hidden costs of turnover, like those associated with productivity and engagement, are challenging to quantify, but knowledge is power, so it’s worthwhile to try.

Consider this list of turnover costs to help you structure an effective retention strategy and employee replacement plan. 

The hiring process

Bringing a new employee into the company might seem like a low-cost venture, but the hiring process can cost quite a bit of money. 

  • First, you have to advertise the position. Depending on how you do that, you may pay fees to post your job posting online.
  • You’re likely to interview multiple people for the job, which takes time away from the interviewer’s primary responsibilities.
  • Once you go through the screening and interview processes and select a candidate, you might have to run a background check on the person for an additional expense. 
  • Finally, when you make an offer, the new hire may have a higher salary than the employee being replaced.

Onboarding and training

After you’ve hired your replacement employee, you must prepare them for their new position with the company via onboarding and job training. Depending on the industry and specifics of the role, the training process could take days or weeks, reducing the time the trainer has to perform their usual work duties.

Productivity

While not every position takes years to master, some new hires may take up to a year to feel very confident in their position. Some new employees take months to years to reach the productivity levels of their predecessors. During the time it takes new hires to get acquainted with their role, you should expect lower productivity. As such, you need to consider each position in your business when determining the actual costs of employee turnover.

Engagement and morale

Losing an employee doesn’t just impact those who participate in the hiring and training process—it can affect other staff members as well. When employees see turnover, particularly high rates, they’re more likely to feel disengaged from the company and confused by the departures.

Moreover, a team member’s departure can greatly impact a team, department and company’s morale.

Work quality

It takes time for new employees to learn their supervisors’ preferences and mold their work product to match company expectations. Until the new team member fully grasps the details of their new role, the quality of their work may not be up to expected standards.

Risk of burnout

During the hiring and onboarding process, the previous employee’s work must still be done. This may add additional responsibilities to other team members, so it may be beneficial to review workloads and distribute them evenly to avoid having employees work longer hours or risk burning out.

Calculating turnover costs

Though you can’t reliably quantify the hidden costs of turnover, such as lowered morale or shifts in company culture, you can use workarounds. For instance, measuring and comparing productivity and profits from pre-turnover and post-turnover may show you the productivity you lost through lowered morale. 

This turnover rate calculation formula helps you and your accounting department stay on top of the overall cost of losing employees and hiring replacements:

(Hiring + onboarding + training) x (number of employees x annual turnover percentage) + lost productivity = annual cost of turnover

Cost of employee turnover example

Let’s say a local diner has gone through its financial reports and found the following information:

  • Hiring costs: $3,281 per year
  • Onboarding costs: $1,315 per year
  • Training costs: $1,829 per year

The management team also looked at profits from a period with no turnover and a period with high turnover and then compared the difference. They found they lost an average of $10,294 per year due to lost productivity. The diner employs 50 people, and it sees a turnover rate of roughly two people a quarter, for an annual percentage of 16%.

Using the cost of turnover formula above, the calculation becomes:

($3,281 + $1,315 + $1,829) x (50 x 0.16) + $10,294 = $61,694

This means the annual cost of turnover for the diner is $61,694 per year. If it can retain just one more employee a year, however, it brings the business’s overall turnover cost down to at least $55,269.

How to combat employee turnover

You can take multiple steps to improve your overall retention rate and combat employee turnover:

  1. Look at your hiring process
  2. Provide flexibility
  3. Offer competitive compensation and benefits
  4. Demonstrate respect
  5. Encourage feedback

1. Look at your hiring process

When you hire the right people, they don’t usually leave. However, this means asking interviewees the right questions. First, define the role clearly and honestly to attract candidates who better fit the position and add to your company culture. Remember—it’s not always about whether a candidate can do the job, but rather what they bring to the organization as a whole.

2. Provide flexibility

In recent years, companies of almost every size found their footing with schedule flexibility. Most employees today expect this perk and want a decent work-life balance, including options for remote or hybrid work. Many managers and employees agree that flexible schedules and remote work positively impact retention. If your company doesn’t offer flexible or remote scheduling, it may lose employees to companies that do.

3. Offer competitive compensation and benefits

Pay your employees fair wages and include raises when they show development, growth and excellence. Ample sick days and paid time off (PTO) make your company attractive to employees, as do good retirement plans. Keep in mind that even good employees who enjoy working for your company may leave if they find an opportunity that pays them more to do the same job. If you can’t keep compensation and benefits competitive, you may want to offer other incentives to entice them to stay, including discounts on your goods and services, gift cards on work anniversaries and charitable contributions in their names.

4. Demonstrate respect

Employees who enjoy excellent treatment may be more likely to stay with your company. Demonstrating respect and care for your workers improves productivity levels and keeps employees more interested and focused on their jobs. When you add this key component to your values statement, you let current and potential employees know that you put a premium on respect because you know it creates a happier, more efficient work environment.

5. Encourage feedback

Ask your employees for regular feedback about the company, their job duties and their supervisors. This way, you can home in on opportunities for improvement and gauge employee satisfaction levels. If your workers feel heard and they notice how your company cares, then they’re more likely to stay with your organization.

Next steps for reducing the cost of turnover

Use these steps to create a strategy that reduces the cost to replace an employee:

  1. Calculate the cost for your business
  2. Rethink performance reviews
  3. Conduct exit interviews
  4. Create development and growth opportunities
  5. Recognize and reward employees

1. Calculate the cost for your business

First, calculate how much it costs your business to lose employees. Every business is unique, and it’s important to know how much you can save by reducing employee turnover. In fact, this knowledge can greatly benefit your operating expenditures, employee productivity and engagement because you know the general amount you save by keeping employees and the amount you lose when employees quit.

2. Rethink performance reviews

Next, identify what does and doesn’t work with your performance review system. Many employees have negative views of performance reviews, feeling they’re inaccurate or unhelpful, so consider revising the process to maximize employee benefit. Focusing on what workers do well rather than where they falter can even increase employee satisfaction by creating an environment of safety and trust.

3. Conduct exit interviews

When employees do decide to leave your company, conduct exit interviews to get a better idea of why they’re going. Do this by conducting in-person exit interviews that ask targeted questions. Alternatively, provide them with a written or online survey that requires detailed answers as part of the exit process.

4. Create development and growth opportunities

Some employees may feel stuck in their positions and seek employment elsewhere if they know they can’t move up to a higher position at your company. If you can’t promote them, try offering classes and training that help them grow in the position they already have. You might also consider cross-training employees in other departments so that when openings occur, they can make lateral career moves if they like. These sorts of opportunities for development and growth may make them more excited to create career path goals and thrive within your organization.

5. Recognize and reward employees

Employees who consistently meet and exceed goals deserve special recognition and rewards. Show them you appreciate their efforts by giving them small gifts or certificates at awards ceremonies. By offering them a sense of achievement and peer recognition, you ensure they feel like the work they put in is worth it.

Employee turnover is a costly reality of running a business. While you can quantify some of the downsides that affect the cost of employee turnover, like recruiting and training new employees, gauging other costs often proves challenging. Understanding all the expenses, both obvious and hidden, helps you manage employee turnover and maintain a successful company.

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