The Hidden Costs You're Paying with Employee Turnover
Whenever I am working with a client who I notice is experiencing higher than normal turnover for their industry, I make it a point to talk business and tie back the financial impact and bottom line risks they are incurring. Sometimes, all it takes is an eye-opening conversation around the numbers to institute a change in the organizational culture and behaviors.
When calculating the cost of employee turnover, most companies do their due diligence by calculating all the tangible costs together, such as:
- Exit costs- HR, client, managerial time;
- Absence Costs- loss of work coverage, productivity disruption;
- Recruitment Costs- advertisement, recruitment, interviews; and
- Onboarding- Onboarding, new hire training, productivity ramp-up.
According to Ere Media, when you consider all of the costs associated with employee turnover including interviewing, hiring, training, reduced productivity, lost opportunity costs, etc. it can cost an organization:
- For entry-level employees, it costs between 30-50% of their annual salary to replace them.
- For mid-level employees, it costs upwards of 150% of their annual salary to replace them.
- For high-level or highly specialized employees, you’re looking at 400% of their annual salary.
For example, let’s say a business loses 12 employees in one year, averaging one per month. Six of these employees were entry-level, with an average salary of $40,000. It costs, on average, $16,000 to replace each entry-level employee at 40% of his annual salary, for $96,000 total. Then four of these employees were mid-level, with an average salary of $80,000. It costs, on average, $120,000 to replace each mid-level employee at 150% of her annual salary, for $480,000 total. And finally, two of these employees were senior, with an average salary of $120,000. At 400% of annual salary to replace them, you’re looking at $960,000 - almost $1 million! That means that at the absolute lowest estimated end of the spectrum, your best case scenario, you are looking at approximately $250,000 as the cost of the turnover of just 12 employees.
The Intangible Costs of Turnover
While it is important to understand the immediate overhead costs and be able to link them to specific numbers, there are so many intangible costs that may not be apparent at the start. Unfortunately, these have shown to be even more detrimental to the overall health of a company than the monetary overhead.
1) Loss of Institutional Knowledge
Whether the employee has been with the company for a year or ten years, when employees leave a job, employers lose the institutional knowledge or history that they take with them. The knowledge the previous employee had was immeasurable in terms of “cost” but the loss is extremely damaging. The new employee can’t “train” on that lost historical data, so must ramp up and learn all the new nuances that come with any job.
2) Lowered Production
You may have a company of 10 employees or 10,000, a missing employee is going to be felt regardless. This person was doing something in his or her role, whether entry, middle or executive level. Each person was helping the company’s growth and stability, and when gone, that person's loss is felt, especially from a client’s perspective. Clients can see and feel when production is lowered; this causes panic within the consumer community. Some may even venture to do business with a competitor, depending upon the level of lowered production.
3) Disengaged Remaining Staff
This can be tricky to measure in dollar form; however, it is a huge problem that shows up in employee’s over-all engagement. The staff that is left has to take over new responsibilities to counteract the loss. These employees begin feeling resentful and, with no pay raise, start looking for new companies where they feel more valued. To compound that, the longer they stay in their overworked roles, the harder it will be for you to regain their trust and engagement levels even after you've filled the vacancy.
Employee turnover has a huge impact on a company’s overall health. Both concrete (math example reflecting percentage of salary) and intangible (production loss, loss of knowledge transfer and overworked staff) calculations show frightening outcomes of high turnover and how it will affect your company.
It’s time to start taking the costs of employee turnover into consideration. While it may make your heart skip a beat to give a high potential employee a raise or to invest in even more training and development, it will be far worse to lose your top producing employees to your competitors throughout the year.
Invest in simple things that make your company a more comfortable and rewarding place to work; this will significantly raise your employee engagement and make employees want to stick around.