Why is employee turnover cost important?
The cost of employee turnover is important for businesses of all sizes because, depending on the volume of turnover, those costs can have significant repercussions on the company’s profits and success. Other than straightforward costs like replacing employees who have left the business, employee turnover has a number of hidden expenses that can vastly impact your business’s bottom line. It’s vital that you take the time to recognize all the potential costs of losing employees and create a plan to increase retention and reduce expenses associated with departures.
Hidden costs of employee turnover
It’s relatively easy to quantify some turnover costs, like the amount of money necessary to hire a replacement. Calculating the total amount of hidden costs like productivity and engagement is a bit more challenging, but a worthwhile exercise. Consider this list of hidden turnover costs to help you structure an effective retention strategy and employee replacement plan.
Hiring a new employee
Bringing a new employee into the company might seem like a low-cost venture, but it can cost quite a bit of money. First, you’ll have to advertise the position. Depending on how you go about doing so, you may pay fees to publish your job posting online. More than likely, you’ll interview multiple people, which takes time away from the interviewer’s primary job responsibilities.
Once you select a candidate, you’ll run a background check on the person, which is an additional expense. Finally, you’ll make an offer and could end up spending more on salary and benefits for the replacement than you did on the person you’re replacing.
Onboarding and training
After you’ve officially hired your replacement employee, you’ll need to prepare them for their new position with company onboarding and job training. Depending on the industry in which you work and the specifics of the role, the training process could take days or weeks, reducing the amount of time the trainer has to perform their central work duties.
Some new employees take years to reach the productivity levels of their predecessors. All of that lost productivity results in lost profits and revenue. Of course, not every position takes that long to master, so you’ll need to consider each position in your business when determining the actual costs of employee turnover.
Losing an employee doesn’t just impact those who participate in the hiring and training process — it can affect other members of the company. When employees see turnover, particularly high rates of turnover, they’re likely to feel disengaged from the company, confused by the departures, and focus less on their work, resulting in lower productivity and lost income potential.
Morale and company culture
The loss of an employee and the introduction of a new colleague can greatly impact a team, department or company’s morale. Low morale can lead to a decrease in productivity, which negatively affects the business’s bottom line. In cases of high employee turnover, the introduction of many new employees at once can dramatically change the company culture. Additionally, remaining employees may seek to know why the other employees left, leading to lack of focus during work hours.
It takes time for new employees to learn the preferences of their supervisors and mold their work product to match company expectations. Until the new employee fully grasps the specific details expected of them in their new role, the quality of their work product is likely to be lower than that of their colleagues.
While the hiring team is working through the process of accepting applications, interviewing, and running background checks, the job responsibilities of the departed employee don’t go away. Others in the department or on the team must take on some of the departed employee’s job duties to ensure all the necessary work is getting done. This takes time away from their own job duties or forces them to work longer hours, which can lead to lower morale and potentially more turnover if you don’t fill the position quickly.
Calculating turnover costs
Some of the hidden costs of employee turnover are not easily quantified, like lowered morale or a shift in company culture. However, you usually can measure productivity and profits and compare them pre-turnover and post-turnover, which accounts for lost productivity due to low morale. Use this formula, with the help of your accounting department, to calculate a specific number to find the overall cost of losing employees and hiring others in their place.
(Hiring + onboarding + training) x (number of employees x annual turnover percentage) + lost productivity = annual cost of turnover
Let’s say Jackson’s 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 to a period with high turnover and compared the difference. They found they lost an average of $10,294 per year due to lost productivity. The diner employs 50 people, and they see a turnover rate of roughly two people a quarter for an annual percentage of 16%.
Using the cost of turnover formula, the calculation becomes:
($3,281 + $1,315 + $1,829) x (50 x 0.16) + $10,294 = $61,694
The annual cost of turnover for Jackson’s Diner is $61,694 per year. If they can retain just one more employee a year, they’ll bring their overall turnover cost down to at least $55,269, if not more with less lost productivity.
Understanding and calculating all the costs, including the hidden ones, of employee turnover can help you create an effective plan to offset those losses by improving employee retention and minimizing expenses during the hiring process.