Employers know that there is a real cost of losing good talent. However, calculating your “turnover cost” can feel a bit abstract, like making an estimated guess. The range of turnover cost can be as low as 30 percent to as high as 250 percent of an employee’s salary. With “the Great Resignation” still affecting businesses across the country, employers are taking a harder look at what their turnover is really costing them. They 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:
- What is the compensation package for the position experiencing turnover? When it comes to calculating turnover cost, you often hear that it will cost you “X” percent of an employee’s salary – similar to the reference I made in the beginning of this article. 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. - How long will it take you to refill the position? The longer a position stays open, the higher the turnover cost will be. The length of time a position remains vacant can drive turnover cost 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, and
- The additional work can drive burnout and future turnover among your remaining employees.
- 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.
- How much does it cost you to source candidates? Unless you are finding top performers on free sites like Craigslist, you likely are spending thousands of dollars to attract the right candidates. External recruiters can cost 20-35 percent of a candidate’s salary and posting on platforms like LinkedIn and Indeed can exceed $50K annually. Even employee referrals will often cost you a few thousand dollars. These numbers only increase for more technical and hard-to-find roles.
- How long does it take a new hire to become profitable? 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 actually 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; 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 on day one 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 not spending that time on profitable activities.
- What are the indirect 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, 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.
This can feel like an overwhelming number of factors to consider when trying to determine what seems like should be a simple calculation. However, you can use our simple turnover calculator as your starting point to evaluate what your turnover is really costing your company. If you are ready to reduce these costs and make an investment in your employees, I would love to help.
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