The True Cost of Employee Turnover
When news of an employee leaving is announced, stomachs drop. As a manager, you immediately start thinking about the business disruption and hours of hiring ahead of you. As a coworker, you know you’re about to take on extra work and responsibility until a replacement is found. And if you liked that person leaving, you’ve just lost a work buddy. It sucks.
Everybody recognizes the stress related to employee turnover. But what about the financial costs?
Studies predict that every time a business replaces a salaried employee, it costs 150% of their salary. This cost is even higher when replacing an executive, ranging up to 400% of their salary. That means if you lose an executive making $150,000, it could cost your business close to $600,000. That’s huge.
While the fees associated with sourcing a new hire can be a big chunk of that cost, it’s not the only one. To calculate the true cost of employee turnover, you need to look at:
Replacement Costs
Advertising costs
Recruiter fees
Time spent conducting interviews
Time spent employee testing
Time for negotiations and paperwork
Replacements costs are the most visible expenses associated with employee turnover. Finding a high quality replacement is tough. Unless you’re a behemoth like Google, you probably don’t have lines of people waiting for your newest job posting. Work is required to attract potential candidates. Sometimes this entails advertising costs - such as social ads or promoted listings on job sites. Even with advertising, countless hours go into outreach, screening, interviewing, and assessments. That’s why many organizations opt to use a recruitment company.
Recruitment companies have huge networks of people, insider knowledge of job markets, and expertise in shortlisting candidates. They’re skilled in the art of “selling” the opportunity in a way that attracts top talent and increases response rate. Working with a recruitment company comes with fees - typically a percentage of salary. However, in exchange they take on all of those hours of work, bring in a higher caliber of talent, and can dramatically shorten time needed to hire. For most companies, shortening the time to hire is the most critical lever they have to reduce the significant indirect costs of employee turnover (which we’ll discuss below).
Onboarding (and Offboarding) Costs
Knowledge transfer
Offboarding administrative tasks
Training and orientation
IT & Admin setup
Offboarding rarely gets talked about, despite how much time it actually takes. When you offboard an employee, hours are spent recording and transferring their knowledge and job function to someone else. You need to recover all of the company assets - like key cards, laptops, phones, proprietary documents, etc. Many times, organizations fail to recover all of these assets, adding to turnover losses.
There’s also the administrative tasks of conducting exit interviews, completing the final pay process and revoking system accesses. Companies lose millions of dollars in cybersecurity breaches each year, and 44.5% of those breaches are done maliciously from current and former employees.
Then there’s onboarding. If you’ve been a hiring manager in charge of onboarding new employees, you know how much time it can take. You sign off on a new hire - and that’s exciting. Then suddenly, it hits you. You’ve been doing your own job, part (or the entirety) of the departed employee’s job and you’re behind on deadlines due to the hours spent hiring. You’re exhausted. Still, the light at the end of the tunnel is out of arm’s reach.
For the next month or two, you’ll need to squeeze an extra 10-20 hours per week into your already overflowing schedule to onboard. Before this new hire can take the reins, you need to train them on the role, familiarize them with the company and processes, introduce them to key colleagues, and ensure they have all of the tools, tech and accesses needed to do the role. Oh, you’ll also need to carefully review their work just in case they’re not as qualified as anticipated and you need to start this whole hiring process over. It adds up to be a month’s worth of hours that could have been spent on revenue-making activities.
Indirect Costs
Lowered employee morale
Lost productivity
Lost knowledge
Exiting employees don’t just affect the business, they affect everyone around them. When your coworker leaves, you can’t help but ask “why?”. And if you already know the reasons, reasons that have made you consider leaving before, you might be inspired to make the move as well. That’s why having an employee leave can often create a domino effect, amplifying the costs and disruption a company is already incurring.
Although leaving employees often give a notice period, it’s uncommon that the business finds a replacement within that time. This gap plus the 2-3 months needed to ramp up a replacement are all slumps in productivity that end up throttling initiatives, timelines and performance. The people who temporarily shoulder the departed employee’s work are often overwhelmed, which can lead to errors that lose business.
Furthermore, employees who spend years with your company build up a wealth of internal and institutional knowledge that leaves with them - beneficial knowledge that people don’t often appreciate until it’s gone. This impacts teams in many ways, and trying to resurface this knowledge can often become a frustrating bottleneck to projects.
Bottom Line
Employee turnover is expensive. People are your greatest asset, and losing a top performer can be like losing a differentiating factor of your business. The loss impacts operations, revenue and employee morale in ways that can snowball quickly.
It’s becoming increasingly important to measure employee satisfaction and implement retention strategies. However, even the companies with the best retention rates still have turnover. When the time comes to hire a new employee, it’s critical to hire the right person the first time around so that you don’t double the expenses of turnover.
At Ari Agency, our north star is to help you find your greatest hire of all time. We go the extra mile to understand your business values, objectives and culture so that we can help you make the best hiring decisions possible. Contact us today to learn more about the trends shaping job markets and how we can help you with your next hire.
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