Business owners are always striving to keep costs down while looking to generate greater profits. But one of the areas of cost that is often miscalculated is the cost of employee turnover. And it is greater than you think.
According to work management company Wrike, employee turnover is costing U.S. companies over $160 billion a year. And Harvard Business Review notes that high performing employees can deliver up to 400 percent more than the average co-worker. Consequently, the loss of a high performing worker can vastly increase the costs that result from their departure.
Employee Turnover is More Than Direct Costs
HR managers and others involved with hiring understand the direct costs involved with replacing an employee that has either left the company, or had to be terminated. Loss of productivity is an obvious one as co-workers and others strive to fill the gap left until a new person comes on board.
In addition, there are the other less obvious costs such as the time spent interviewing, processing and onboarding a new hire, training, and other direct recruiting and hiring costs involved. Unfortunately, what is often lost on owners and managers is that the direct costs are really only about one-third of the total cost of employee turnover.
For example, there are costs associated with the unfulfilled position that typically exceed any savings derived from salary and benefits no longer being paid during that time. In addition, there are the costs of recruiting, advertising, and possibly fees for recruiters or placement services.
Even after a new hire comes on board, there is often a long "learning curve" before that individual reaches a point of desired productivity. And even then, depending on the strengths and experience of that new employee, it's always possible that they may not reach the level of expertise and productivity of the person they were hired to replace.
Especially if the previous employee was one of your "high performing" workers noted by the Harvard Business Review article.
[Graphic from www.retensa.com]
Not every new employee hired is going to be replacing a management-level, six-figure salary former worker. But even an $11 or $12 an hour employee can potentially cost a company as much as $4,000 in turnover costs, both direct and indirect.
The Real Cost of Employee Turnover
A Huffington Post article on the costs of employee turnover had the following,
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 many studies and a variety of statistics that support the contention that employee turnover costs are significantly higher than most businesses realize. The bottom line and common denominator is that it often costs a business far more than most believe or think.
Estimating Employee Turnover Costs
One approach for determining relatively accurate estimate of employee turnover costs for a company is to multiply the number of employees who leave or are let go in a 12-month period by the average cost of employee attrition. This requires that you have a good estimate of those costs, however.
The actual costs incurred through employee turnover will, of course, vary from one business to another, but there are some common costs that can be used to determine a baseline estimate.
It can be assumed that most organizations are going to incur costs int these four major areas when losing an employee:
- Cost of the time that the position is unfilled
- Costs for recruiting and hiring a replacement worker
- Costs involved with onboarding a new hire and subsequent training
- Initial and ongoing costs of employee education and development
The key to minimizing these costs in general is to minimize employee turnover. This is accomplished by optimizing your recruiting and hiring practices to ensure only the best new hires for the positions and the company. In addition, actively working to create and perpetuate a work environment that is engaging, rewarding and designed to cultivate employee loyalty can help to keep your best workers around for a long while.
Your Business is Built on Quality Employees
It's always a good time to make changes and improvements to your recruiting and hiring process. It always pays to regularly review your practices and policies with the objective of improving your employee development practices.
Your HR management staff is responsible for functions such as payroll management, tax filings, employee records compliance, and so forth. In addition, they are also tasked with the bulk of the hiring functions, as well.
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.