It’s natural to think that when an employee leaves a company, the company saves money. After all, the company isn’t paying that person his or her salary anymore, at least for the time the position remains open.
If a manager-level employee who earns $60,000 annually leaves a company, and this position is left vacant for six months, the easy calculation would be to say the company saved itself $30,000, or $5,000 for each month the position was left open. Add in contributions to health care and retirement, plus Social Security and state taxes, and the company may have realized a short-term savings that could be significant.
Analyzing employee turnover in that way, though, is not only short-sighted, it is flat out incorrect. The cost of employee turnover is significant. It is not a savings; it is a significant expense.
Most companies today understand this concept, although they may not truly understand what the general cost of turnover is or, more specifically, what the cost of employee turnover is within their company. As such, a lot of businesses still don’t understand the true value of building a solid company culture, one that supports its employees, in the process making them want to stay at the company, and attracting top-notch candidates from the outside as well.
It’s essential for all businesses to do a cost-benefit analysis of building a solid company culture and reducing employee turnover.
The Estimated Cost of Employee Turnover Varies
While it’s almost universally accepted among business advisors and economic pundits that employee turnover has a true cost to businesses, what that estimated cost is varies greatly.
Some, like Maia Josebachvii, who serves as the “Head of People” and is a part of the leadership team at Stripe, says the turnover cost for sales people is enormous. In a 2016 whitepaper, she said retaining a sales person for one additional year (from two to three years) could result in a $1.3 million difference in net value to that company over a three-year period.
Other more conservative estimates, such as the one used by The Society for Human Resource Management, says the cost of replacing an employee is between 90-200 percent of their annual salary. That would mean the cost of turnover for the hypothetical position above would be anywhere from $54,000 to a whopping $120,000.
In its “2018 Retention Report: Truth and Trends in Turnover,” released in September of that year, SHRM found employers in the U.S. will pay about $600 billion in turnover costs in 2018. That cost is expected to increase to $680 billion by 2020.
But the true cost of employee turnover is much higher than that, because …
There are Hidden Costs to Employee Turnover
The estimates above include what can be measured, items such as:
- Overtime hours paid to other employees to make up the work
- The cost of recruitment
- The cost of training and getting up to speed
- Any loss productivity the position would have generated
There are other costs associated with turnover, too, though, that are simply hard to measure in real numbers.
It’s an interesting time in business today. While technology seems to be taking over menial tasks that once took humans hours to accomplish, the fact remains that computers can’t replace people. It’s ironic that as technology advances and becomes more prevalent in the workplace, the value of people continues to increase as well.
But it’s true: Workplaces are environments made up of groups of people, bonded together to accomplish similar goals. Through this teamwork, employees form bonds with each other, much like a family or tribe that sticks together.
When one member of this organization leaves, it affects more than just that person and the position that is now vacant. It affects how others perform as well.
While some employee turnover can be for happy reasons – such as the retirement of a long-tenured worker – the other reasons for the turnover could all be the cause of lower performance among other employees and lower employee morale.
The fact is, when one person leaves, others who are still at the company have to pick up the slack, one way or another. It isn’t a simple plug-and-play model, like replacing a computer.
The extra work starts at the top, as managers and leaders in the organization are forced to take time away from their more important tasks to figure out how to fill the hole created by the turnover. That extra legwork then trickles down to the other rungs on the ladder, as employees on the same pay-grade are now required to do more work to compensate for the loss.
Even if the team is able to bind together and pick up this slack until a new employee is hired and on-boarded successfully, there is still a cost the company incurs as a result.
Other employees may become burnt out or behind on their work. Other employees may become weary of the organization, if the turnover rate is high. Other employees may have fallen behind on their normal workload as they chipped in in other areas.
In addition, there could be a loss of knowledge with the turnover the company will never, ever regain. It’s what’s known as tribal knowledge, defined as, “any unwritten information that is not commonly known by others within a company.”
When a person with this knowledge leaves a company, then, he or she takes it with him.
Focus on Employee Retention
All of these reasons are why employee retention is key. It’s important companies are able to understand what their specific employee turnover rate is, how much that might be costing them and what they can do to reduce it.
Every company is going to have turnover. It’s just a part of doing business. Some of this turnover will be for good reasons – i.e. the retirements – but others can be avoided if a company puts a good employee support and retention program in place.
This program should include proven strategies for retention, such as building a solid workplace culture, including employees in the business so they feel valued and incentivizing employees not just with money, but with benefits and offerings that keep them happy and healthy in and out of the office.