Employee turnover is costly. Some of the cost is in monetary terms and fairly straightforward, but much of it is intangible and hard to determine. Employee turnover is particularly costly for small-to-medium-sized businesses, or SMBs.
Here’s a rundown of employee departure costs, replacement costs and other intangible costs associated with turnover.
The monetary cost of an employee’s departure is somewhat easier to calculate than most other costs.
When an employee leaves, direct costs for a company include:
- Accrued paid time off, including unused vacation and sick days.
- Manager’s time, including efforts to retain an employee, exit interviews and adjustments for loss of production, whether temporary or permanent.
- Temporary employee pay or overtime pay for other employees.
- Human resources staff time, including conducting exit interviews and handling the paperwork associated with payroll and benefits administration.
These costs don’t include intangibles such as possible lost productivity when an employee is disgruntled, considering leaving, interviewing for other jobs or in their last two weeks after giving notice.
These intangibles are hard to predict because they really depend on the employee—productivity may go down for one employee but not for another.
Employee departures cost a company time, money, and other resources. Research suggests that direct replacement costs can reach as high as 50%-60% of an employee’s annual salary, with total costs associated with turnover ranging from 90% to 200% of annual salary.
Examples include turnover costs of $102,000 for a journeyman machinist, $133,000 for an HR manager at an automotive manufacturer, and $150,000 for an accounting professional.
If these estimates strike you as high, keep in mind that in addition to the obvious direct costs associated with turnover (such as accrued paid time off and replacement expenses), there are numerous other costs.
—Society for Human Resource Management
Replacement costs are somewhat straightforward. When a company hires a new employee, some of the direct costs include:
- New hire compensation.
- New hire benefits, including health insurance, retirement savings contributions, travel reimbursements.
- New hire inducements, if applicable, including signing bonuses, perks, relocation expenses.
- Staff time spent doing onboarding, including orientation, benefits enrollment, and payroll.
- Manager and department employee time spent on welcoming new hires, helping them adjust and performing on-the-job training.
Production, Organizational and Other Intangible Costs
Here’s where things get a little murky. It’s far easier to calculate the direct costs associated with employee turnover than it is to calculate some of the more intangible costs.
When a company replaces an employee, some of the intangible costs include:
- Lost production, both during the time a position is vacant and during the time it takes a new employee to get up to speed.
- Lost quality of work, including customer service.
- Lost customers, particularly in the case of sales representatives with longstanding relationships with certain customers.
- Increased competition, if an employee moves to a competitor or starts a company.
- Tainted talent pool, in the case an employee’s departure causes other employees to leave.
- Lost knowledge.
The type of employee we’re talking about is a big factor here. Losses will vary depending on whether an employee was high-performing or low-performing and depending on the employee’s unique attributes.
It is one thing to lose a highly valued, high-performing employee and quite another to lose a disgruntled, underperforming employee whose skills are outdated. Indeed, the turnover of some employees may end up saving an organization more money than it would cost to replace that employee.
All employees are unique, and all employees take a unique set of attributes with when they leave.
An employee with 10 years in the industry may take more experience with them than an employee with only two years in the industry.
However, an employee only two years out of college may take with them a fresher approach or mindset than someone 10 years out of college.
Employees aren’t just numbers, they’re people, which makes it impossible to assign an exact number value to employee turnover. There are numbers involved, certainly, but there are many other elements as well.
—Ryan Braley, Avitus Group Director of Human Resources and Risk Management
The Tangible and the Intangible
Employee turnover is costly in tangible ways—in dollar amounts, in lost productivity and in time spent by staff like HR personnel, managers and departmental coworkers. However, turnover is also costly in intangible ways—knowledge, experience, ideology, attitudes, relationships and more.
Preventing employee turnover requires proactive efforts. Understanding employee turnover at your company is a good start, followed by hiring practices that help prevent employee turnover and interviewing processes that help prevent employee turnover as well.