The Cost of Employee Turnover
Employees are like parts in a machine. When an employee leaves, you replace that part with a new part, and the machine keeps running along. This mindset has been common in many businesses for decades. One researcher refers to this as the “watchmaker” mentality, in which a business is a precisely tuned machine that is controlled by the owner.
But that is not reality when it comes to humans. Employees are not just cogs in a machine, they are living, dynamic individuals who have interactions with all the humans around them. They are also unique, differentiated by talent, capacity, experience, and areas of weakness and strength. Replacing an employee who has left your organization is not the swapping of identical parts.
There are costs to employee turnover – some obvious and quantifiable, and others that are opaque and difficult to sum. Estimates of costs for employee turnover range from direct costs being 50% - 60% of the lost employee’s annual compensation, to well over 200% of the lost employee’s annual salary when considering all cost factors.
This leads to the question: what is your cost of employee turnover? What kind of toll does it take on your business when you lose an employee?
To know your costs of employee turnover, it is important to understand and consider both direct and indirect costs.
Lost productivity prior to replacement – The loss of an employee shifts responsibilities and tasks to the remaining team. This impacts the rest of the team’s ability to get their own job done and can result in overtime or burnout. The level of impact is in part determined by the size of the team that lost the individual and the uniqueness of the role within that team. Losing the only person who handles complex customer complaints has a more dramatic impact than losing one out of a group of ten. This direct cost of loss of productivity has an immediate impact on the company until a replacement is hired.
Recruiting – The costs of recruiting can vary in each industry. In some instances, finding a replacement is easy, e.g. a coffee shop. In other industries, recruiting a person with the right technical skills can be more problematic, e.g. an engineering firm. Recruiting can include the time spent by the Human Resources department to screen and identify candidates, interview time spent by the supervisor and team members, as well as interactions after the interview to discuss the results. Another direct cost to consider is outside recruiters that often charge up to 25% of the new hire’s annual compensation.
Training – New employees require time from their supervisor and peers to learn how to perform the duties and responsibilities of the position. While formal initial training might be performed in 2 – 4 weeks, ongoing training can last 3 – 12 months depending on the position’s complexity.
Lost productivity during ramp up – The new employee continues to impact the individuals who work around them – supervisor, peers, and subordinates – for a lengthy period of time beyond the initial training. The new employee must learn a myriad of tasks, tools, methodologies, and procedures. During this ramp up period, they take more oversight time from their supervisor, slow down their peers with questions, and are less effective in managing their subordinates. This cost varies per position but can be quantified.
In addition to the quantifiable, direct costs listed above, there are a variety of hidden costs that impact the overall cost of employee turnover.
Lost institutional or tribal knowledge – Losing an employee is losing knowledge. In most instances, you’ve spent hours investing in an employee. When they leave, the knowledge that your company has imparted also leave. And it’s a gamble whether the replacement will develop the lost knowledge and over what period of time.
Lost revenue generation – Losing an employee may impact revenue generation. While this may be obvious in a sales-oriented position, the reality is that many positions indirectly impact revenue. A poor customer service experience created by high turnover can have a meaningful impact on company revenue.
Cost of tasks that were not completed – Employee turnover creates confusion and chaos as that person’s tasks are reassigned. The potential to miss a task, or for the completion of that task to be delayed, is a very real possibility. This cost is not easily quantifiable but does have an impact. The “opportunity cost” of not getting the work done due to turnover includes lost opportunities to launch new products, to improve quality, or to lower costs.
Impact on morale – It is difficult to quantify the impact on morale, but losing employees has an impact on the existing employees. Team members often feel stress and lower morale; some team members will undoubtedly question if they need to reconsider their commitment to the organization.
Impact to internal customers – Internal customers in departments that work with the affected team may have their operations negatively impacted by the loss.
Impact to external customers – External customers may experience a lower quality of service or delays in receiving products due to the turnover.
If you’re navigating entrepreneurship and building a business, hiring is part of your job description. You know how critical each member of your team is and that people are your biggest asset. Bring on the right person and enjoy immeasurable benefits; hire the wrong person and face new levels of stress. This is why knowing your cost of employee turnover is essential. Once you know the total impact of losing an employee, you can better assess how to keep your existing employees.
Know the cost – both direct and indirect – of losing an employee you would like to keep. And determine to invest the time and energy before they leave to keep them engaged and committed to your organization.