A high employee turnover can leave your company financially crippled. Read for the 5 most impactful staff turnover costs and how you can 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. However, it can be problematic if left unchecked. A high turnover rate deals damage from multiple angles, from the expense of recruiting and training new hires to the loss of institutional knowledge and a tarnished reputation. Gallup estimates that U.S. businesses lose an astounding $1 trillion annually due to voluntary turnover.
Fortunately, you can mitigate the impact of high turnover with a well-calculated response. A good starting point is understanding the primary cost factors of employee turnover. Only then can you develop a proper action plan.
In this article, we discuss 5 primary costs of employee turnover:
- Training and onboarding
- Reduced employee morale
- Loss of institutional knowledge
So, let’s dive in and reduce rising employee turnover rates.
Turnover results in recruitment costs
Most of the time, when an employee leaves, you must spend money to replace them. According to a study by The Society for Human Resource Management (SHRM), the average cost of replacing an employee is 6 to 9 months of their salary. This cost covers:
- The time it takes to find a new staff member
- The cost of advertising
- Recruitment agency fees
You may also have to pay a signing bonus or other incentives to attract top talent.
According to a study by The Society for Human Resource Management (SHRM), the average cost of replacing an employee is 6 to 9 months of their salary.
Recruitment costs are often unavoidable and can wreak havoc on your budget if your employee turnover is high. Nevertheless, you can keep them at bay with these proactive measures:
- Only hire when necessary. Do not bring in new staff to have extra hands on deck. Not only will this be a waste of money, but it can also lead to overstaffing, which can cause a different set of problems.
- Use cost-effective hiring methods. When you need to hire, use budget-friendly methods like employee referrals or social media recruiting. You can also leverage AI-powered recruiting platforms to help you find suitable candidates at minimal cost and effort.
- Develop a robust internal talent pipeline. Investing in your current employees’ development can significantly reduce your reliance on outside recruiting when a staff member leaves. You can also consider creating a retention bonus program for key employees who agree to stay with you for a set duration and work on their development.
Training and onboarding cost
When you hire a new employee, you must provide training to get them up to speed with your company culture and how things are done. Depending on the position, this process can take weeks or even months, and onboarding costs can quickly spiral out of control if you have a high amount of turnover.
A report by the SHRM places the average cost of onboarding a new hire at $4,100 per individual. This total includes costs like orientation, training, and paperwork processing. Additionally, new employees usually take time to adjust to their new position and reach peak productivity. According to a survey by the Harvard Business School, typical mid-level managers take 6 months to achieve their breakeven point. While not easily quantifiable, the costs associated with this adjustment period can be significant.
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 the onboarding process: A standardized onboarding program can help you cut training costs by as much as 20%. Trainers get more efficient at delivering the material, while all new employees receive the same high-quality training.
- Leverage online learning: Not all onboarding sessions need to be physical meetings. Online training can be equally effective yet significantly less expensive than face-to-face sessions. 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 a new hire through their first few months can speed 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.
The cost of reduced employee morale
Employees often form close bonds with their coworkers and develop a sense of camaraderie. Therefore, when one of them leaves, the remaining employees tend to feel disengaged or demotivated.
Reduced morale can tremendously impact productivity and, as a result, your bottom line. A Gallup study found that disengaged employees cost U.S. companies $450 to $550 billion annually. Some staff members even start questioning their reasons for staying, resulting in a chain reaction of additional resignations.
Here are some steps to protect your team’s morale when an employee leaves.
- Communicating openly with your employees: Letting your staff know about the resignation 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.
- Reassigning tasks and responsibilities: When an employee leaves, their responsibilities need to be reassigned to someone else. Take this time as an opportunity to mix things up and give other employees a chance to take on new challenges.
- Showing appreciation for your employees: Thanking employees for their hard work and letting them know they are valued can go a long way in preserving morale. You can also show appreciation by investing in their development or offering additional perks and benefits.
Minimizing the impact of turnover on employee morale requires a delicate balance of communication and action.
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The cost of being short-staffed
Losing an employee can have a ripple effect that reaches far beyond the individual. As a result, your employees can feel overwhelmed and stressed.
Besides putting strain on your staff, being short-staffed can also hurt your company’s reputation. Customers can get frustrated if they have to wait longer for service or if the quality of the product or service suffers.
Reducing the impact of short-staffing can be challenging, especially when an employee leaves unexpectedly. Nonetheless, you can get ahead of this cost with some calculated steps.
- Optimize task distribution: When employees leave, look closely at their responsibilities and see if they can be divided among the other staff members. That way, you can avoid putting too much pressure on anyone.
- Cross-train employees: Cross-training your staff members in different areas can help you keep things running when someone leaves. An employee who is already familiar with the work can fill the gap more comfortably until a new hire comes on board.
- Encourage open communication: If an employee struggles with their workload, it is essential to encourage them to express it openly. This way, you can provide additional support before the situation gets out of hand.
When one person leaves, the remaining staff must pick up the slack while you look for a replacement and get them up to pace.
The cost of loss of institutional knowledge and experience
When longtime or highly skilled employees leave, they go with a wealth of knowledge and experience. Unfortunately, this gap can be too big for new or remaining employees to fill, and it can take months or even years to rebuild the same level of expertise.
The loss of institutional knowledge is often one of the most challenging turnover costs to manage. The best way to avoid this cost is to foster a culture of learning and expertise sharing.
When longtime or highly skilled employees leave, they go with a wealth of knowledge and experience.
Below are some helpful starting points when developing this culture.
- Build a knowledge base: Encourage employees to document their knowledge and experience in a central location that everyone can access. This can be an online repository, intranet site, or even a physical binder in the office.
- Create mentorship opportunities: Promote knowledge sharing by pairing up experienced employees with those who are newer to the company. This way, your staff can benefit from the wealth of experience and knowledge your more tenured employees possess.
- Encourage open collaboration: Make it easy for employees to share their ideas and expertise by creating an open and collaborative environment. Simple steps like weekly team catchups and work contest events can go a long way toward promoting knowledge sharing.
Besides recruitment and onboarding costs, a high turnover rate can also cause diminished morale, employee burnout, and loss of valuable institutional knowledge and expertise.
Manage employee turnover costs by maximizing retention
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. However, remember that maximizing employee retention is the most effective way to arrest turnover costs.
Encourage your employees to stick around for the long haul by:
- Building a positive workplace culture that fosters open communication, collaboration, knowledge sharing, and respect.
- Investing in employee development and growth opportunities to demonstrate your commitment to their career advancement.
- Creating a competitive compensation and benefits package that meets or exceeds industry standards.
- Promoting work-life balance to keep your staff happy, healthy, and engaged.
- Being open to employee feedback and using it to continuously improve the workplace.
That way, you can maintain a team that is committed and invested in your company’s success.