The Real Cost of High Employee Turnover
High employee turnover is one of the most crucial concerns of any business of any type or size.
Globally, more than 50% of the world’s top companies have difficulty in retaining their most valuable talent costing an average of 33% of their annual salary when they leave. While large organizations deflect most of the upfront cost of sourcing, hiring, and training new staff, smaller companies with fewer recruitment resources and offer less competitive employment packages struggle and can only dream of maintaining low employee turnover.
The Financial Impact of High Employee Turnover
Retaining your employees is just as important as retaining your customers—because both have a positive impact on your bottom line.
It pays to have a talent strategy that wins the loyalty of your staff. In fact, companies with optimised talent generally:
• Outperform other businesses by 16% in terms of strategic success rates
• Have 30% lower turnover of top performers
• Have 34% higher employee performance, and
• Spend 31% less time on talent issues.
Prolonged high employee turnover can lower your staff’s morale, decrease their productivity and, in the long term, adversely diminish your organization’s overall competitiveness and profitability.
For example, the estimated cost for replacing one employee with an average salary of $40,000 is around $104,000.
Several hidden factors are behind these staggering costs, from sourcing, recruitment, and onboarding expenses to lost productivity and decreased capacity.
And the higher your employee turnover rate is, the more you will have to spend to hire a replacement compared to retaining your current staff.
Calculating the Cost of Employee Turnover
Determining employee turnover cost starts with knowing the average pay rate of the existing employees, their supervisor(s), and the HR/recruiting/payroll specialists involved in the handling of the exit and replacement processes.
Refer to the formula below to compute the hard costs and soft costs of employee turnover:
To compare, hard costs are more conspicuous in your financial statements as they are incurred when an employee decides to part ways with your company. This encompasses separation costs, vacancy costs (in case you’ll require them to render overtime or get a temporary hire), and replacement costs (including recruitment and training processes).
The second set of costs to consider are soft costs. These expenses are more latent – they’re computed as the loss in productivity as a result of the employee’s departure, which includes a decreased capacity of the team where the employee was part of, as well as the time spent by the supervisor, HR, recruitment, and payroll departments to facilitate the exit and replacement of the staff.
COST BREAKDOWN OF EMPLOYEE TURNOVER
| HARD COSTS | + | SOFT COSTS |
|---|---|---|
| * Exit Interview * Payout of annual leave for departing employee * Other separation costs (unemployment benefits) | Separation costs | * Loss of productivity of departing employee (existing employee performance commonly reduces to 50% to 75% of normal productivity) * Lost productivity of co-workers (increased time discussing departure and organisational conditions * Increased workload for employees |
| * Current employee extra work (added shifts or overtime) * Temporary hire | Vacancy costs | *Lost productivity during new hire learning curveLost productivity of co-workers mentoring and supporting new hireLost productivity of supervisor due to additional coaching and oversight needed for new hire |
| *Loss of productivity of departing employee (existing employee performance commonly reduces to 50% to 75% of normal productivity)Lost productivity of co-workers (increased time discussing departure and organisational conditionsIncreased workload for employees | Replacement costs | * Lost productivity during new hire learning curve * Lost productivity of co-workers mentoring and supporting new hire * Lost productivity of supervisor due to additional coaching and oversight needed for new hire |
