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According to a Gallup study, the cost of replacing one individual employee can range from one-half to two times the employee’s annual salary. Having lots of your employees leave to work at other companies is a problem. Not only is it disruptive to your business, but expensive as well.
But have you ever really quantified the actual costs of employee turnover? You might be in for a surprise - and it will open your eyes to the real business case for reducing turnover and increasing employee retention.
This blog post will share everything you need to know about employee attrition and how to calculate such an intrinsic turnover rate in your organization.
What is employee turnover?
Employee Turnover measures how many employees leave your business in a given period. It’s normal, of course, for employees to leave their jobs at some point.
Employees might depart because they're moving across the country, retiring, or switching job fields. That kind of turnover is natural, and it's not harmful. According to a study by SHRM, the annual rate for high-performer turnover is, on average, 3%.
But most turnover is avoidable - and expensive. Most of the time, employees leave your business to work elsewhere because they're unhappy with their manager, salary or benefits, career progression, or your company culture. (More to come on the major causes of employee turnover below.)
Too much turnover damages your business on many levels, not just financially. That's because, for any business, people are your most critical asset. Your business can't run without the people working in it daily.
So when you're losing lots of them to other companies, you're letting go of your company's core. And that's profoundly damaging to your business's long-term health and wealth.
Measuring the cost of employee turnover
Ask any employee, HR pro, or business guru, and they’ll tell you that, yes, employee turnover is bad. Of course, it makes sense - employees leaving your business isn’t a good sign!
You don’t need an MBA to tell you that. But few people know the actual cost of employee turnover. And that’s a problem because turnover costs businesses much more than they know.
If you don’t know what too much turnover is costing you, you won’t understand the urgency of fixing the problem.
So let’s take a look at the actual costs of low retention to your bottom line.
1. The financial cost
The most accessible cost of turnover to calculate is the financial toll it takes on your business. Employees are eventually an asset to your company, but at the beginning of their career with you, they are at a cost.
Recruiting, hiring, and training all incur monetary costs - and you can’t get around that spend. Plenty of data is available on how much it costs to replace just one departing employee, depending on their level and length of time in their role.
So how much does it cost to replace an employee who leaves in real dollars? There are many ways to estimate the cost. Still, a good benchmark is 50% of the salary for entry-level employees, 125% of the salary for mid-level employees, and over 200% of the salary for a senior executive. That’s a lot. That’s tens of thousands of dollars, at the minimum, you need to spend every time a single employee leaves your company.
Of course, this rate varies by industry and company - you can calculate the exact turnover cost for your business with this spreadsheet calculator from SHRM. But that fiscal cost, stunning as it might be, is not the only cost you incur with every departure.
The knowledge cost
Every year that an employee works for your company, they gain more knowledge. They learn things like the necessary processes and procedures for getting things done the way your business does them.
They gain experience in working with your clients and customers and build relationships with them. They build relationships with each other. They go from needing training to being able to train other employees. They mature into management roles. They increase their invaluable institutional and industry knowledge.
When they leave, all of that leaves as well. Unlike tools like printers, office chairs, or your breakroom fridge, employees are an appreciating asset. They gain more value with every year they stay at your company, because of all they are learning and applying every day.
So if you’re regularly losing employees to competitors after just two or three years, you’re also losing that long-term learning employees are absorbing and passing onto newer hires too. You also lose the valuable relationships that your best employees develop with your customers.
You might end up losing one or more clients along with an employee - and that can be devastating for your business. You can’t afford to let your star performers slip away for preventable reasons.
The morale cost
Let’s face it - if you regularly have employees quitting after just a couple of years - or a couple of months - you probably have something going pretty wrong in some part of your employee experience. Building strong employee morale isn’t easy when workers are always walking out the door.
High employee turnover rates can be both a cause and a symptom of low employee engagement and morale. If employees don’t like coming to work every day and don’t feel engaged in their work, they’re more likely to leave.
And we have probably all had the experience of being on a team where person after a person leaves - and it starts to feel pretty ominous.
The employees left behind have to pick up the slack, they mourn their lost relationships with the departed coworker, and they begin to wonder if they should leave too. It can cause a vicious cycle of ever-increasing turnover until you’re left with only the newest and least-experienced employees who have nowhere else to go.
What are the major causes of employee turnover?
The causes of employee turnover are complex - there’s no one switch you can flick that will suddenly keep your employees from walking out the door. But there are some consistent trends to look out for.
Why does an employee leave their current jobs?
Employee engagement is also a crucial factor in employee turnover rates. If your employees feel disengaged from their job and your company, they are more likely to leave to find better pay or a shorter commute.
You can review the best data-driven strategies for reducing employee turnover and increasing employee retention in our recent blog post. What’s most important to know is that most employee turnover is preventable.
Your average employee wants to stay in the job they have and grow at your company - you need to make that possible for them. And with the sky-high costs of losing employees, a small investment can yield significant returns over time.
Who does employee turnover matter to?
Too often, companies believe that only their HR department should be concerned about the high employee turnover rates. After all, it’s a human issue, so it’s a human resources problem.
But really, employee turnover affects many different parts of your company. It’s also vital for finance and operations to know the cost of losing employees so you can all think strategically and holistically about how to turn the trend around.
Finance can help calculate the ROI of any measures you’re thinking of taking to turn around your turnover trends. And if they’re too focused on what you’re spending to retain employees without looking at the real costs of too much turnover, you’ll need to get them on board with the hard numbers so you can take action together.
Operations can play a similar role and should be involved in discussions about the true cost of your turnover. Looking at the hard numbers as a team can help convince key stakeholders of the need to take action.
It’s one thing to know that employee turnover is costing your company money - it’s another thing to lay out the actual numbers and associated costs to the business.
No one thinks high employee turnover rates are good for business. But until you truly know how much each departing employee costs your company in recruitment and training dollars, lost institutional knowledge, and team morale, you can’t start to develop effective solutions. The good - and bad - news?
Most employee turnover is preventable. Once you’ve calculated the actual cost of losing employees, you can start to strategize about the best ways to retain them instead. And then you’re on the road to building a sustainable, successful business that your employees love to work for.
Increasing employee engagement with Empuls
Looking for a holistic solution to increasing employee engagement, motivating, and empowering your employees? Employee engagement is a critical factor in reducing turnover and stopping attrition before it happens.