Ensuring your employees remain working effectively and productively is a challenge every organization is currently faced with. As the skill gap continues to increase, fewer qualified employees are available and there is greater competition to acquire them.
Because people are an “appreciating asset,” the ability for organizations to retain their workforce is fundamental to their long-term success, and programs are being developed to reflect this. Hiring and training new employees is a costly proposition, and includes more than just the accompanying direct monetary cost. In order to get a full picture of the cost of employee turnover, organizations must examine both the direct and indirect costs necessary to fill voluntarily vacated positions.

What are the direct costs of replacing an employee?

Direct costs can run the gamut from separation costs (such as exit interviews and severance pay) to replacement costs (advertising the position, conducting interviews, and employment testing, for example) to training costs (which could include orientation, certifications, or on-the-job training).

Statistics indicate that the direct cost of replacing an employee depends on their position. For example, replacing a mid-level employee can cost 20 percent of their annual salary, meaning a $60,000 per year manager can cost about $12,000 to replace. Meanwhile, replacing a high-level employee, with large salaries and specialized training, can cost up to 213 percent of their salary. This puts the direct cost of replacing a $100,000 per year C-Suite Executive at up to $213,000.

The indirect costs of employee turnover

Although the indirect costs of high employee turnover are harder to measure than the direct costs, they are very real and are very costly if overlooked.

Indirect costs of employee turnover can include factors like lost productivity; lost engagement, as existing employees begin to question why turnover is so high and start to disengage; and others, such as lost institutional knowledge, reduced morale, and even gossip. While none of these factors can have their impact tracked with an exact monetary value, they still certainly exist as a cost to organizations and should not be ignored when examining the impact of employee turnover.

 So, what causes employee turnover?

At its core, turnover has to do with employee engagement. A common belief is that compensation is the central driving force behind turnover, but this isn’t the case. While, assuredly, being paid too little will result in high turnover, over-compensating an employee will not make up for a poor work environment. This would suggest that other factors, such as a lack of career advancement opportunities, maladapted organizational culture, or a poor work environment play a key role in determining the amount of turnover an organization experiences.

When employees feel like they aren’t being valued for their contributions, or if they feel they’ve stagnated in their position and don’t see opportunities for career advancements, they will start looking to have these needs met elsewhere. This is why it is pivotal for organizations to recognize employee engagement as a contributing factor to turnover – even a 1% improvement in the odds that an employee remains for their next role translates to hundreds of retained employees for a 10,000-person employer.

Now what?

Employee turnover is a very costly issue facing every business today. It is a problem that is measured not only by the financial ramifications involved in replacing a lost employee, but one that can also be measured by intangible costs, such as lost productivity, engagement, morale, and even institutional knowledge. It is a problem caused primarily by a lack of employee engagement, and can thus be treated when an organization strategically examines factors like their employee selection process and their overall company culture.

Because of the improving economy’s effect on the competition for talent, the ability for companies to maintain their workforce will only become more essential as time passes. There are several ways for this problem to be addressed, but what they all have in common is their focus on improving the employee experience.

The True Cost of Employee Turnover