The Real Cost of Employee Turnover—and How to Prevent It

As talent professionals, we know that “compensation” is more than just salary. To get a complete picture of an employee’s compensation, you have to consider non-salary benefits (like paid time off, health insurance, 401k, etc.) and other perks as well as the paycheck that lands in their bank account.

In the same way, the cost of employee turnover involves much more than just recruiting expenses. In fact, the total cost of replacing an employee can range from one-half to two times the employee’s annual salary. That’s because losing an employee involves added costs like:

  • Hiring. This includes expenses related to advertising, interviewing, screening, and travel reimbursement.
  • Onboarding. Bringing on a new employee often requires training, plus time and attention from both managers and mentors.
  • Lost productivity. Ramp-up time for a new hire to reach full productivity can be up to two years.
  • Errors and poor customer experience. New employees make more mistakes and take longer to complete tasks.
  • Intangibles. Turnover can cause a loss of engagement among other employees, as well as low morale.

When you consider that voluntary turnover ranges from 12% to a whopping 60% annually (depending on your industry), it’s clear that the cost of employee turnover can quickly get out of hand. 

Calculating the Cost of Turnover 

Unfortunately, the real cost of turnover is difficult to measure, because most companies lack the cohesive systems needed to track relevant metrics across various departments like HR, finance, and operations. That said, there are several tangible numbers that you should keep in mind: 

  1. Hiring costsRecent research from the Society for Human Resource Management (SHRM) shows the average cost of hiring a new employee is $4,129. If you offer signing bonuses and relocation packages, be sure to include them in your calculation. 
  2. Temporary employees and overtime. You may need to allocate additional budget to hiring temporary workers or paying overtime to fill the gap left by departing employees 
  3. Training costs. New employees often require specialized training to learn their job. TrainingMag research puts the average cost per learner at $986—but don’t forget hidden costs, like shipping materials to remote employees. 
  4. Time to full productivity.This is a pretty simple calculation based on average ramp-up time. If it takes the average new employee three months to fully onboard, the cost is 25% of their annual pay, six months is 50% of annual pay, and so on. 

For budgeting purposes, you can either calculate this cost for each position or role, or determine the average cost across your organization. Either way, the number will likely surprise you—providing strong motivation to make sure valued employees want to stay with your company long-term. 

Why Do Employees Leave? 

Conventional wisdom says that employees change jobs to increase their salary. However, while compensation does play a part in the decision to leave a job, study after study shows that pay is not the most important driver. Other factors like a communication, leadership, workplace environment, and a lack of appreciation are cited far more often. 

Jobvite’s 2020 Job Seeker Nation Survey found that career growth is the most critical factor (56%) when looking for a new job. Compensation is also an important consideration (54%), followed by benefits (49%) and flexible schedules (33%). 

All of these statistics lead to one clear conclusion: employee turnover is largely preventable. In fact, a study by the Work Institute found that more than three-quarters of employees who left a job voluntarily could have been retained by employers. The keys are providing career opportunities, creating a great workplace, and making employees feel valued. You may have to invest some money, but you’ll end up saving in the long run. 

Also—don’t get caught thinking that the current economic conditions will prevent your employees from leaving. The job-hopping trend of the 2010s may have slowed, but it hasn’t stopped entirely. In fact, more than 2.6 million US employees voluntarily left their jobs in June 2020, amidst the coronavirus pandemic. In a recent webinar, our panel of experts shared that job seekers have become more cautious about making a move and they’re exercising more due diligence—but that doesn’t mean they aren’t looking for new opportunities.  

How Can You Reduce Turnover? 

Depending on the size of your organization, employee turnover may be costing you tens of thousands of dollars each year. Sure, you could simply divert this cash into your employees’ bank accounts—but you’d be much better off investing in efforts to make your employees want to be part of your organization.  

Here are five areas to focus on as you work to limit employee turnover: 

  1. Employer brandYour employer brand refers to the way your company is perceived as an employer, and the way you differentiate yourself to potential employees. It’s important to establish an authentic and consistent employer brand in the marketplace, to ensure that job seekers understand who you are as a company, how you treat your employees, and whether your values align with their own—leading to fewer surprises once they’ve been hired.  
  2. OnboardingIt’s no secret that a significant percentage of new hires leave within the first year, or even the first six months. If you want employees to stick with your company, you need to set them up for success. An effective onboarding program will help new employees acclimate to the company, their team, and their responsibilities—ultimately leading to a better experience. You may have to get creative with onboarding in today’s remote environment, but that doesn’t make it any less important.  
  3. Internal mobilityGiving employees an opportunity to grow within your company is a win-win. For employers, it turns your workforce into a robust talent pipeline. And for employees, it increases job satisfaction and creates an incentive to stay with your company for the long-term. But building an internal mobility program takes more than good intentions. Check out our tips from Week 9 of The Summer to Evolve to learn more.  
  4. Employee engagement and cultureAs we mentioned earlier, workplace environment is one of the top drivers of employee turnover. Creating a culture that keeps employees engaged takes some effort, but it doesn’t have to be expensive. Even little changes can make a big difference. Keep in mind, your company’s values have just as much impact on culture as free snacks and ping-pong tables. A recent LinkedIn study revealed that 86% of millennials would take a pay cut to work for an employer who shares their values. 
  5. TechnologyEmployees expect a simple, intuitive, and seamless experience at work that fosters creativity, enhances productivity, and encourages collaboration. Using top tools at your organization leads to increased job satisfaction for employees—extra points if you seek their preference of work computer. 

One other note: once an employee has decided to leave, it’s seldom worthwhile to present a counteroffer. Changing jobs is a complicated decision—by the time an employee resigns, they’ve likely been feeling undervalued for quite some time, and expended a lot of effort to secure the new opportunity. A last-ditch effort to keep them around won’t change those hard feelings.