Employers know that there is a real cost of losing good talent. However, figuring out how to calculate your “turnover cost” can feel a bit abstract, like making an estimated guess.
Turnover costs can considerably vary, ranging as low as 30 percent to as high as 250 percent of an employee’s salary. This is causing employers to take a harder look at what their high turnover is really costing them.
Employers know they need to make investments to retain their talent, but they first need to understand the true expense of turnover so they can accurately calculate their return on those investments.
When trying to determine your turnover cost, it is important to consider these seven factors:
1. What is the compensation package for the position experiencing turnover?
When it comes to calculating employee turnover cost, you often hear that it will cost you “X” percent of an employee’s salary. However, focusing only on salary can cause you to underestimate how much it will cost in its entirety for you to replace that employee.
Turnover should always be calculated using the entire compensation package for a specific position. For example, a sales position may offer a lower base salary but have a robust commission/bonus. An executive may have a high base salary but may be responsible for the cost of their benefits.
2. How long will it take you to refill the position?
The longer a position stays open, the higher the average turnover cost will be. The length of time a position remains vacant can drive turnover costs in three ways:
- The work remains incomplete, which will affect your profitability
- You are paying someone else to complete those tasks, which may entail overtime, additional comp like spot bonuses for the extra work, or outsourcing fees
- The additional work can drive burnout and future high turnover among your remaining employees
3. Who is involved in your hiring and onboarding process, and how much are they paid?
Each hour spent sourcing, interviewing, and onboarding is an hour not spent on something else that can drive your revenue. While these tasks all go into maintaining a functional workforce, recognize that each hour dedicated to these activities represents its own cost. This time could otherwise be allocated to revenue-generating endeavors or strategic initiatives that propel the business forward. For instance, instead of spending hours onboarding a new employee, those hours could be channeled into developing innovative products or improving customer service, both of which directly contribute to revenue growth and overall business success.
4. How much does it cost you to source candidates?
Unless you are finding top performers on free sites, you likely are spending thousands of dollars to attract the right candidates. External recruiters can cost 15 to 25 percent of a candidate’s salary and posting on platforms like LinkedIn and Indeed can exceed $50K annually. These numbers only increase for more technical and hard-to-find roles.
Even employee referrals will often cost you a few thousand dollars if you offer a referral bonus to teammates who introduce you to top talent.
5. How long does it take a new hire to become profitable after training?
When a new hire starts, they do not turn a profit for you on day one. The period between when you fill a position and when that employee becomes efficient enough to make you money is the costliest timeframe in the employment lifecycle. You are now paying a new employee while work is still being handled (or not) by someone else until the new employee gets up to speed. Again, this cost only increases for executives and technical positions, as ramp-up times for these employees can often last a year or more.
How much do you spend to train a new employee? Again, this will vary based on the position, experience, and level of technicality. Even if you do not spend money on formal training (which can run $5,000-10,000 per new hire), as mentioned above, there is ramp-up time for any new hire. No one comes in and hits the ground running.
On-the-job training may not include writing a check, but there is still a real cost involved. The time your team members spend training a new colleague means they are spending less time on profitable activities.
6. What are the hidden costs that impact your profitability when an employee resigns?
We examined what high turnover may cost your company in tangible forms such as compensation packages, time to fill vacancies, and onboarding. However, there are also hidden indirect costs to turnover. These drivers can be exponential and can have lasting effects long after your positions have been filled.
What Are Indirect Turnover Costs?
What are the hidden costs that impact your profitability when an employee resigns? Your indirect costs are the most difficult part of turnover cost to calculate, but arguably the most critical.
Indirect costs include loss of company knowledge and best practices, disrupted relationships with vendors and customers (and the resulting impact on customer retention), intellectual property risk, company reputation (have you read your Glassdoor ratings recently?), and disengagement of the team members who remain.
Because these costs can be so difficult to quantify, here is a further breakdown of five indirect cost impacts to consider:
1. Loss of company knowledge and best practices.
The longer someone was in a role, the more likely it is that there are processes and procedures they did automatically without documenting. Troubleshooting and recreating these processes will take time and can be a frustrating process for the incumbent.
2. Risks to relationships with vendors and customers.
The impact of a departing employee on external relationships can be costly. Do you have vendor contracts with favorable terms or pricing because of the relationship they had with your former employee? Will your customers follow that former employee to their new employer? Will your company’s viability come into question if clients are constantly being introduced to new team members servicing them?
3. Loss of intellectual property.
It is standard practice for employers to require employees to sign non-compete/non-disclosure documents upon commencement of employment.
The goal is to prevent them from taking trade secrets to their next employer, lowering the risk of theft of patents, trademarks, trade secrets, and copyrights. While overt theft may be rare, it is not uncommon for an employee to take best practices with them to their next employer, who may be your direct competitor.
4. Compromising your company’s reputation and public relations.
If you do not have a defined process for reviewing and responding to Glassdoor reviews, put that at the top of your priority list. While most companies can avoid the overwhelming “bad press” about their culture and employment practices that companies like Uber and Amazon have been plagued with, your reputation can take a hit from just a handful of negative Glassdoor reviews.
This is especially critical in a tight labor market when employees have their choice of companies. Many prospective candidates use sites like Glassdoor as the first stop in their decision-making process before their resume ever hits your desk. If you have low application rates, check your Glassdoor rating.
5. Disengagement of team members who remain.
High turnover may have the greatest impact on the employees who remain. They have lost a teammate — potentially someone they considered a friend — and they now have an outside view of other opportunities. Plus, they are often expected to absorb the work that remains. All these factors can lead to disengagement. According to a recent Gallup poll, 15 percent of American workers are actively disengaged (with only 36 percent considered actively engaged).
Research conducted by McLean & Company found that actively disengaged employees can cost their employer 34 percent of their salary annually. Based on Gallup research, an employee who is simply “not engaged” can still cost their employer 18 percent of their salary. Higher absenteeism, lower productivity, and lower profitability all come into play when calculating the cost of employees who are not engaged.
How to Calculate Employee Turnover and Reduce Costs
It may feel overwhelming to understand the true cost of turnover. However, you can use this simple Turnover Calculator as your starting point to evaluate what your high turnover rate is really costing your company and take steps to reduce it.
Explore our Talent Advisory services to see all the ways Kreischer Miller can reduce your average turnover costs and make an investment in your employees. Contact us for more information.