Cost of Employee Turnover

Understanding the cost of employee turnover helps employers strategize to reduce employee turnover, improve retention, and save money. Here’s how.

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The 5 Primary Costs of Employee Turnover and How to Manage Them

Here's what you need to know about the 5 primary costs of employee turnover and how to manage them:

  • You can mitigate the impact of high turnover with a well-calculated response.
  • The loss of institutional knowledge is often one of the most challenging turnover costs to manage.
  • Reduced morale can tremendously impact productivity and, as a result, your bottom line.

Employee turnover is typical for most businesses. But the cost of employee turnover tends to be high and could lead to financial hardship if left unchecked. Most estimates indicate businesses in the U.S. collectively lose billions per year due to voluntary turnover alone. But whether it’s voluntary or involuntary in nature, employers and human resources teams can learn to curb the impact. A good starting point is understanding the fiscal consequences of employee turnover, which include direct and indirect costs. In this article, we discuss both. Let’s dive in.

Direct costs associated with high employee turnover

Direct costs are tangible dollar losses companies can calculate to help gauge their overall spending. Here are common direct costs associated with high turnover.

Employee turnover results in higher recruitment costs

Most often, companies must pay on several levels to recruit a new hire to replace a lost worker. This means going back to square one in the hiring process and absorbing the costs of:

  • Advertising and recruiting.
  • Sorting through applications.
  • Screening candidates.
  • Interviewing.
  • Recruitment agency fees, if applicable.

In a tight market, you may also have to pay a signing bonus or offer other incentives to attract top talent. Multiply each employee by this dollar amount each time someone leaves. Over the course of a year or more, these expenses can wreak havoc on a budget.

Training and onboarding costs

When you hire new employees, they’ll need training in how things are done. New staff will also need to begin establishing professional relationships with coworkers and acclimating to the company culture. Depending on the position, this process can take weeks or months. Meanwhile, total onboarding costs are adding up. The more obvious costs involve:

  • Paperwork processing.
  • Orientation.
  • Training costs, which involve time and possibly also instructors and materials.

Also account for time-to-productivity norms. New employees usually take time to adjust to their new positions before reaching peak productivity. This can take anywhere from 6 months to 2 years. While not easily quantifiable, the real cost associated with this adjustment period can be significant.

Competitive pay costs

Depending on the job market, another direct cost is investing in competitive pay and compensation-related employee retention strategies. An employee’s salary or wage is important. In a tight market, companies often must offer more than average salary to attract and keep talented new employees. Top candidates will typically be seeking great pay and benefits and a company with whom they can grow and advance. Opportunities for career development, work-life balance, flexible work hours or conditions, and financial and job security all matter to them. Offering competitive pay and perks creates associated expenses and may require realigning the company budget. Naturally the goal in doing so is to ultimately reduce employee turnover and improve retention — a long-term money-saving strategy.

Indirect costs with employee turnover

The indirect costs associated with employee turnover are harder to quantify. Yet they can dent a budget just like direct costs do.

Decline in employee morale

Employees frequently form close bonds with their coworkers, developing a sense of camaraderie and trust. When a coworker leaves, remaining employees sometimes begin to feel disengaged or demotivated. Overall employee satisfaction can take a hit.

This reduction of employee engagement and morale can tremendously impact productivity and, in turn, negatively affect the organization’s bottom line. Some staff may even second guess their own reasons for staying, sparking a chain reaction of resignations.

Loss of tacit knowledge and experience

When longtime or highly skilled employees leave, they take with them a wealth of knowledge and experience. Unfortunately, the void might be too significant for new or remaining employees to fill. Following even 1 departure, it can take months or years to regain the level of knowledge and expertise lost.

Decreased performance or productivity can be among the most challenging intangible turnover costs to manage when you lose tacit knowledge. The best way to avoid it is to foster a culture of learning and expertise sharing.

Negative effect on customer and client relationships

When existing or new employees are overwhelmed or suffering from low morale, poor performance will likely increase. This ultimately trickles down to:

  • Lower quality of customer service.
  • Driving away customers and clients.
  • Putting the company’s reputation at risk.

How to keep turnover costs at bay

It may be hard for leadership to determine exactly how much low employee retention rates contribute to lost revenue. But there are simple formulas for how to calculate employee turnover, and doing so can provide valuable insights. Using proactive measures, you can then boost employee retention and better control your employee turnover rate.

Lower hiring costs

You can start with lowering hiring costs. The following strategies can help.

  • Only hire when necessary. Do not bring in new staff to have extra hands on deck. Have management and HR professionals focus instead on investing in your existing employees and their team morale.
  • Use cost-effective hiring methods. Budget-friendly ideas include employee referrals, social media, and online recruiting platforms.
  • Develop a robust internal talent pipeline. Investing in your current employees’ development can significantly reduce your reliance on outside recruiting. Consider retention bonuses and leadership development opportunities for key employees who agree to stay with you for a set duration.
  • Be open to employee feedback. Apply honest feedback to further development of retention strategies that attract and motivate talented employees.

Streamline onboarding processes

Onboarding is an unavoidable outcome of employee turnover, but you can make the costs easier on your bottom line. Here are some suggestions for keeping onboarding expenses at a minimum.

  • Standardize your onboarding program and process. This can help you significantly cut training costs. Trainers become more efficient at delivering the materials, while new employees receive the same high-quality training.
  • Leverage online learning. Online training can be as effective as in-person yet significantly less expensive. It is also more flexible and can be tailored to an individual’s needs and schedule.
  • Establish a work buddy program. Having a more experienced employee help guide new hires through their first few months can speed up onboarding and reduce training costs. New employees will also be more likely to stick around if they have someone to help them adjust during this nerve-wracking period.

Focus on boosting employee morale

Employee morale can contribute to the success or failure of a business. A positive company culture does matter and is worth the investment. Here are some steps to protect your team’s morale when an employee leaves.

  • Communicate openly with your employees. Letting your staff know about a departure and why it happened can help quell rumors or speculation. It also shows you are transparent with your employees and willing to listen to their concerns.
  • Sometimes an employee’s departure requires reassigning their responsibilities to other employees. Approach those who value professional development and advancement and may appreciate this opportunity to embrace new challenges and excel.
  • Show appreciation for your employees. Thanking them for their hard work and the value they bring can go a long way in preserving morale. Can you also offer any tangible rewards?

Employee retention to control the cost of employee turnover

Employee turnover can be costly and disruptive for any organization. Understanding employee turnover costs can help you take proper steps toward protecting your business from severe exposure. Maximizing opportunities to reduce turnover and improve retention is a most effective approach.

For this, develop a comprehensive employee retention strategy designed to encourage your employees to stick around for the long haul. Nurturing and maintaining a team that is committed to your company’s success is well worth your thoughtful investment.

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