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What Employee Turnover Really Costs Businesses

Posted by Leslie Ruhland on Aug 1, 2017 9:03:00 AM
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No business wants to see good employees leave, but what many businesses fail to appreciate is the very real costs associated with employee turnover.

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According to the US Department of Labor and Statistics, an employee leaving can cost a business up to 33% of that employee’s total compensation including both salary and benefits.

But just as costly is the impact on employee morale. When a disaffected co-worker leaves an organization it has an effect on the rest of the staff, causing some to reconsider their own commitment and “job satisfaction.

Consequently, a crucial aspect of human resources best practices is for hiring managers to prioritize reducing turnover a company’s employee turnover. However, in order for this approach to be successful, employers and managers must first understand the real reasons why employees quit.

The Major Causes of Employee Turnover

It’s been said that employees don’t quit their jobs – they quit their managers. While there may be much truth in this saying, studies have shown that there are a number of specifics that routinely mark employee turnover.

A study by BambooHR noted that the three main reasons employees leave a company is

  1. Lack of advancement
  2. Poor work/life balance
  3. Money

In other words, money was not as significant as an opportunity to work their way up and having a positive and healthy balance between the demands of their job and their personal lives.

The same study noted that the five top “deal breakers” for disenchanted workers quitting their jobs included:

  • Inflexibility of management
  • Difficult co-workers
  • Not being trusted by management
  • Being expected to work “off the clock”
  • Managers blaming employees for mistakes

The Real Cost of Employee Turnover

According to an article in the Huffington Post on the costs of employee turnover,

Maia Josebachvili, VP of People at Greenhouse, produced a case study where she argued that retaining a sales person for three years instead of two, along with better onboarding and management practices, yields a difference of $1.3 million in net value to the company over a three year period.

Slightly more conservatively, Josh Bersin of Deloitte believes the cost of losing an employee can range from tens of thousands of dollars to 1.5–2.0x the employee’s annual salary. These costs include hiring, onboarding, training, ramp time to peak productivity, the loss of engagement from others due to high turnover, higher business error rates, and general culture impacts.

There are a number of other studies and various statistics referenced when speaking of or writing about employee turnover costs. The bottom line and common denominator is that is costly, often costs a business far more than most believe or think.

How to Calculate Your Employee Turnover Costs

One simple formula for determining an accurate estimate your company’s cost of employee turnover is multiplying the number of employees lost in a given year by the average cost of employee attrition.

The actual costs incurred when losing an employee will naturally vary from business to business, but there are some common and universal costs that can be used to determine a baseline.

Typically, most organizations are going to face these four major cost areas upon losing an employee:

  • Cost of time with the unfilled position
  • Costs for recruiting and hiring a replacement worker
  • Cost of employee onboarding and any training required
  • Initial and ongoing costs of employee education and development

This can be constructed as a formula based on the Huffington Post article that would resemble the following:

(Unfilled Position + Recruiting/Hiring + Onboard/Training + Development)

X (Number of employees who quit) X (Annual Turnover Percentage)

_____________________________________________________________

= Annual Cost of Employee Turnover

A simple example would be, if you are a 50 person company with 10% annual turnover, and you spend $5k per person on hiring employees, $5k on training, $5k for development, and lose $10k of productivity cost while replacing an employee, then your annual cost of turnover would be about $125,000.

The idea is not so much to have an accurate metric as to have a clear grasp of the immensity of the costs involved – costs that are too often overlooked or underestimated.

Reducing Employee Turnover Begins Before Hiring

Here are some of the long-term outcomes of effective new employee onboarding, according to the SHRM Foundation,

Beyond the short-term issues related to employees’ initial adjustments, many long-term outcomes of onboarding affect a firm’s bottom line. When surveyed, organizations perceive effective onboarding as improving retention rates, time to productivity and overall customer satisfaction.

For employees, long-term outcomes of good onboarding include job satisfaction and organizational commitment.

New employee onboarding, when done correctly, it can lead to greater job satisfaction lower turnover, higher performance levels, and lowered stress. The ideal employee onboarding process should really begin before a new employee is even hired. In other words, one of the fundamental elements of a successful onboarding process is having the right employee coming on board!

Your Employees are a Vital Investment in Your Business

It's not too late to begin making adjustments or improvements to your current processes. In fact, this could be a perfect time to review your recruiting, hiring and training processes with the goal of improving them and your overall employee development practices.

In addition to a growing and demanding role in recruiting, hiring, and continually training employees, the HR staff is responsible for other functions they are typically tasked with such as payroll management, tax filings, employee records compliance, and so forth.

Considering alternatives such as outsourcing is increasingly becoming a cost-effective and strategic option. Accuchex can help you in managing your HR needs, payroll processes, and staying on top of compliance demands. Get your Free Download: Payroll Outsourcing Guide to help you make an informed decision or call Accuchex Payroll Management Services at 877-422-2824.

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Topics: HR best practices, recruiting and hiring, HR management practices, employee lawsuits, employee onboarding, employee turnover

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