Employee Retention: What Employee Turnover Really Costs Your Company

employee retention

It’s one of the largest costs in all different types of organizations, yet it’s also one of the most unknown costs. It’s employee turnover. Did you know that the average cost of replacing an employee is six to nine months of that employee’s salary? That’s a lot of money down the drain! In today’s blog, we’re going to take a look at what employee turnover really costs your company, and how you can keep your employees from walking out the door.

Employee retention is key to keeping your business running smoothly. Not only is it expensive to replace an employee, but you also lose all the knowledge and experience that that employee has acquired while working for your company. In order to keep your business from hemorrhaging money, you need to make sure your employees are happy and feel appreciated.

Employee retention is a huge issue for companies, and one that is often difficult to get a handle on. There are many reasons why employees leave, from lack of career growth opportunities to poor management. And once employees have left, it’s often expensive and difficult to get them back.

How Much is it Costing You?

Companies routinely record and report costs such as wages and benefits, Workman’s Compensation Insurance, utilities, materials, and space, yet most companies have no and report the cost of employee turnover.

Several studies have estimated the cost of losing an employee:

The Society for Human Resource Management (SHRM) reported that on average it costs a company 6 to 9 months of an employee’s salary to replace him or her when all costs — recruiting, interviewing, hiring, training, reduced productivity, et cetera, were considered. For an employee making $60,000 per year, that comes out to $30,000 – $45,000 in recruiting and training costs.

Studies also show that the cost of losing an employee depends upon their position.

  • An entry-level employee turnover cost is between 30% and 50% of their annual salary to replace.
  • A mid-level employee turnover costs between 125% and 150% of their annual salary to replace.
  • A high-level or highly specialized employee costs approximately 400% of their annual salary to replace.

Let’s do the math for a moment. Hiring a replacement for an entry-level employee earning $20,000 annually would cost $6,000 – $10,000! That’s for a single employee. 

Now think about higher level positions in your organization where there has been some turnover, perhaps supervisors. Estimate their annual average pay and the number of supervisors you lose annually. For example, if their average annual pay is $40,000, 125% of their annual pay means it costs $50,000 to replace just one supervisor. If this company loses ten supervisors a year, then 10 times $50,000 equals $500,000 in replacement costs for just supervisors. This is the bottom line cost. The top line cost? If the company’s profit margin is 10%, then it costs $5,000,000 in revenues to replace these ten supervisors.

Do these numbers seem unbelievable? Actual turnover costs are usually much higher than we think they are — until we estimate them.

You may be thinking, “Some employee turnover is unavoidable, even desirable.” You’re right. Some turnover is necessary, to replace marginal or poor employees with more productive ones and to bring in people with new ideas and expertise. However, high turnover costs are both avoidable and unnecessary.

This is where companies need to focus their efforts. The goal is to retain valued performers while replacing poor ones.

Most companies group both types of performers together when looking at turnover. By doing so, they’re missing the cost and significance of replacing the good performers.

Why Don’t More Companies See This as a Costly Problem?

There are a variety of reasons this is not seen as a problem, all of which cost companies in expertise and dollars. How many of these occur in your organization?

  1. No process is in place to calculate real costs.
  2. Costs are not reported to top management.
  3. The time lag between the occurrence of the turnover and the realization of the cost is too long.
  4. Management does not see it as their responsibility to track or control turnover costs.
  5. The financial officers are not made aware of the potential impact of employee turnover on profits.
  6. There is no standard reporting procedure for turnover costs.
  7. A centralized human resources department may not exist or be able to track all the necessary data.
  8. The cost of turnover is seen as a sunk cost, and therefore irrelevant to decisions made about retaining employees.
  9. Employees are considered an expense item, rather than an investment in the company’s future.

What Costs Need to be Fully Estimated?

A comprehensive program measures the following costs:

  • Exit costs
  • Recruiting
  • Interviewing
  • Hiring
  • Orientation
  • Training
  • Compensation & benefits while training
  • Lost productivity
  • Customer dissatisfaction
  • Reduced or lost business
  • Administrative costs
  • Lost expertise
  • Temporary workers

There needs to be advance agreement among Human Resources, Finance, and Operations as to which cost measures will be considered valid. Then, it has to be measured and reported.

How To Combat The Employee Retention Problem

Prevention is what works best. Begin to measure your turnover costs and, very importantly, look at who is leaving so you’ll know if you’re retaining your best people.

The time to do this is now. Waiting until there’s a crisis to take action limits your options and success rate. It also often triggers the common response of offering more money to get someone to stay, instead of fixing the original problem.

Why Do So Many Retention Efforts Fail?

These are among the most common reasons company retention efforts fail, even when they’re implemented by capable people.

  1. No assessment, so ineffective solutions are chosen. In their hurry to correct a costly problem, companies often forgo conducting a relatively brief and cost-efficient assessment in order to correct the situation faster. However, implementing a solution without diagnosing who is leaving, and why they’re leaving often results in solutions that are incapable of solving the root causes behind turnover. Diagnosing the reasons behind turnover always pays for itself. Don’t start without an assessment.
  2. Implementing too many solutions instead of the most effective solutions. Managers often brainstorm a number of plausible solutions, then implement many of them, especially those favored by top management. However, what is most needed is to select and implement a limited number of solutions which will be most effective at solving the problem. Implementing too many solutions, even good ones, will diffuse your resources and weaken your efforts and success.
  3. No way of measuring success to know what works. How do you know which retention solutions you’ve implemented are working effectively and which aren’t, where you need to make refinements, and what strategies you need to drop if you don’t have a way of measuring your results?

How Do We Do a Better Job of Retaining Valuable Employees?

First, rank your employees in three categories: best performers, middle performers, and lowest performers. Your objective is to retain your top performers; develop and retain your middle performers, turning them into near-top or top performers if possible; and potentially replace your lowest performers.

Second, agree internally on the measures you’ll use to calculate turnover costs. Be certain you’re taking all costs into consideration. Most organizations greatly underestimate them.

Third, report turnover costs to top management on a monthly, quarterly, and annual basis.

When turnover costs are unacceptably high, or higher than your industry’s average, do an assessment. Find out who is leaving and why they’re leaving. Exit interviews can help you find out why.

You need to know if it is your top, middle, or lowest performers who are leaving so you can gauge the expertise level leaving your organization. You’re obviously going to employ (and pay for) different strategies if your top performers are voluntarily leaving, compared to middle or lowest level performers.

Develop solutions capable of solving the problems you uncover, and only implement a limited number of them.

Measure the success of your retention efforts, and refine them.

Two Key Strategies to Save Money On Employee Retention

Key strategy # 1: Don’t wait until turnover costs become unacceptably high before you implement an ongoing retention program. Put a retention program in place before you have crisis situation. You not only must find out why employees leave your organization, you must also find out why others stay.

Key strategy # 2: Survey your top performers now in order to find out what keeps them there, why they might leave, what type of competitive offers they may find attractive, and what they need to be happier and more productive in their jobs. You’ll do a better job of keeping them (along with their expertise and value). You’ll also find out highly beneficial information about improvements your organization needs.

This means driving improvements in your organization by what your best people tell you, instead of focusing on taking care of the ever-present complainers in every organization.

Conclusion

In conclusion, employee retention is a large cost to businesses, and one that can be prevented by ensuring employees are happy and feel appreciated. By offering career growth opportunities, competitive wages, and good management, you can keep your employees from walking out the door.

Thank you for reading our blog! We hope you found it informative. MGR Workforce would be happy to help you with your temporary staffing needs. Contact us today and let us send you a temp worker to help scale your business.

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