Calculating the cost of employee turnover

How much does employee turnover matter?

The exact figure varies widely, but experts agree that the true cost of replacing an employee is much greater than the cost of retaining one. Finding new employees is costly and time-consuming for an organization, especially when employee turnover is unexpected and unwanted.

Obviously, efforts to reduce employee turnover make a lot of financial sense. Replacement costs are a drain on resources, but the true value of a lower turnover rate goes deeper. As well as lowering employee turnover costs, retaining the right people is also better for the less tangible aspects of your business’s success, such as your company culture, and employee experience.

When an employee leaves, staff members may feel destabilized and under pressure to cover the workload or help new hires onboard and integrate. High levels of turnover make it difficult for managers to maintain a cohesive team and foster team morale among their employees. High turnover also makes it more challenging for employers to recruit job seekers and retain employees who are satisfied with their current experience at work.

It’s worth remembering however that zero employee turnover is not only impossible, it’s generally undesirable as a business goal. Unless a business is very small, employee turnover is a necessary element of business growth, bringing in new ideas and energy and a range of experience gathered in other employment or in education. That includes voluntary turnover, such as retirement, and involuntary turnover (termination).

Facts and figures: the cost of employee turnover

Gartner has predicted a 20% jump in employee turnover between pre-pandemic averages and 2022. Given that Gallup reported in 2019 that voluntary turnover was costing US businesses a trillion dollars a year, that’s a staggering amount of financial loss.

• Employee turnover results in increased costs related to poor product quality, according to groundbreaking research from the University of Pennsylvania’s Wharton Business School. In a smartphone manufacturing business, each percentage-point increase in the weekly turnover rate for workers increased product failure by 0.74% to 0.79%. The associated costs were in the hundreds of millions of dollars.
• Analyst Josh Bersin has placed the cost of replacing an employee at 1.5 to 2x the employee’s annual salary.
• SHRM reported that the cost of replacing each hourly employee at a Midwest convenience store was $1500, partly due to the cost of paying overtime to other workers who unwillingly covered the shifts of the absent hourly employee.

In light of research like this, and in the context of the Great Resignation it reflects, knowing how much losing an employee is likely to cost you in real terms is a pressing priority.

Direct and indirect cost of employee turnover

Maertz & Campion (1998) divided the cost of employee turnover into direct costs and indirect costs. The direct costs are easy to quantify, while the indirect costs are less concrete but may have far-reaching implications, such as decreased productivity and poor performance.

source: https://open.lib.umn.edu/humanresourcemanagement/chapter/7-1-the-costs-of-turnover/

Direct costs include:

• Recruitment and training costs
  You and your team have to spend time and money recruiting and training replacements. Scheduling interviews, deciding between candidates, and carrying out the administration around setting up a new employee can all take their toll. A new employee’s salary may need to be higher than that of the outgoing employee in order to win a desirable candidate in the current crowded employer market.
• Lost productivity
  You lose productivity thanks to effort spent on replacing the departed worker. You also lose potential productivity while replacing an employee because their role is not being performed during that time. Quality and consistency of output may suffer.

Indirect costs include:

• Employee morale and company culture
  Your team is thrown into a state of flux as new people learn the ropes, which can make things much more difficult for everyone involved. Secondary costs may arise, such as lowered productivity among other employees and even the risk that other employees leave the business.

Calculating the cost of employee turnover

The true cost of employee turnover will vary between businesses, and indeed between employees, as it depends on a whole range of factors from ease of recruiting new hires to the amount of knowledge capital the lost employee represents.

To get a handle on the cost of employee turnover generally within your business, it can be useful to employ a standard formula like this one offered by Jack Altman, writing in the Huffington Post.

(Hiring + onboarding + development + unfilled time) x (number of employees x annual turnover %) = annual cost of turnover.

Let’s work through the cost of employee turnover for a company of 100 people with 10% annual employee turnover.

The company spends an average of $20,000 per employee on hiring costs, including advertising, interviewing, selection and human resource management.

It spends a further $20,000 on onboarding and employee development, training up the new hire and orienting them in their new role.

There is a $50,000 lost productivity cost stemming from having the role empty while the new person is found, hired and brought on board.

($20,000 + $20,000 + $20,000 + $50,000 = $110,000) x (100 x 10% = 10) = $1,100,000

Cost of employee turnover = $1,100,000

What causes employee turnover?

High levels of unwanted employee turnover can happen for a few reasons. To truly understand what’s driving employee turnover in your business, it’s important to pay close attention to employee feedback.

A program of employee listening can help you identify whether your issue is a result of one or more of these common factors:

• Employee engagement
  Low levels of employee engagement are associated with a number of unwanted outcomes. An engaged employee is 87% less likely than an unengaged one to want to leave their organization.
• Salary and benefits
  An employee’s salary is unlikely to be the only reason they want to leave, but if it’s failing to cover their expenses or a lack of competitive pay makes them feel undervalued, it could be an important factor influencing their desire to leave. Likewise, lackluster employee benefits may make other employment options look more attractive.

• Training and development
  Employee development can help employees feel more positive about their work. Knowing that they are progressing through training towards a desirable goal, such as promotion, can give them more of a sense of purpose. Clearly signposted career development opportunities can make employees feel more valued, knowing that the company wants to invest in them.

• Company culture
  A company culture that’s negative or even toxic is an obvious reason for a high turnover rate. Whether it’s an atmosphere of judgment, an unsustainable ‘workaholic’ company culture or an atmosphere of chaos and disorganization, an unhealthy company culture can push your best people towards the exit.

• High turnover
  An environment where people are continually leaving may become self-perpetuating if the negative effects of employee turnover aren’t being addressed. High employee turnover lowers morale, and new employees who are not yet settled in their jobs may feel ambivalent about their choice of employer if they see other employees leave around them. High turnover also incurs lost institutional knowledge, meaning there is less opportunity to learn from others and a lack of positive company culture to immerse in.

How you can reduce employee turnover

If employee turnover costs are an issue for your business, it may be time for a program of employee retention strategies.

As we’ve mentioned, employee listening is a crucial part of keeping your employee experience positive and becoming aware of potential problems before they take hold.

When it comes to employee retention, you need to understand

• what behaviors and sentiments predict employees leaving
• What departing employees say when they’re giving honest feedback

Maintain a listening pulse

Regular pulse surveys will help you identify the messages from employees that predict intent to leave. You can use this feedback data to course-correct when employees are at risk of attrition. Employee listening offers a number of other benefits, including making employees feel heard and creating opportunities to show that you value their knowledge and act on the information they provide.

Conduct exit interviews

Exit interviews are an important point in the employee journey, as the employee will be looking back on their employment journey as a whole, and will also have their reasons for leaving fresh in their minds. Use exit interviews as a listening post to help identify if there are any common themes in why people leave.

Create a culture that values employees

Drive employee morale and employee retention by promoting a culture of respect and listening. Creating a sense of psychological safety, where employees feel able to share their views whether or not they fit the prevailing norms in the company, can lead to innovation and inclusivity. It also helps employees give honest feedback, which is important for understanding how and why employee turnover occurs.

Prioritize wellbeing

Employee wellbeing support can come in the form of employee benefits, such as healthcare and paid time off, and in the way a company is run, with emotional and practical support on offer to help prevent burn-out and stress. Initiatives like flexible working can be helpful for employee morale and employee retention, as can a good work-life balance.

Start building your organization’s success

Qualtrics offers a powerful and comprehensive platform to help you diagnose the causes of employee turnover, improve company culture and improve retention.

Request a free demo to learn more about how we can help you develop your employee experience management program and employee listening.