The High Cost of Employee Turnover

by Stacey Lett, Director of Operations – Eastern U.S. – Proactive Technologies, Inc.– Proactive Technologies, Inc.

Most companies are dealing with uncomfortably high levels of turnover. When one separates out those employers that facilitated high turnovers to lower labor costs, there are many reasons for this. However, there is no denying the many costs associated with this that exist and the effects that often compound. These costs are often unknown and unmeasured, but all employers should keep an eye on this challenge and explore its full impact on the organization.

It seems counter-intuitive, but there are some who even recently promoted a business strategy that encouraged employee turnover. In a July 21, 2015 Forbes article entitled “Rethinking Employee Turnover,”  author Edward E. Lawler III, “Indeed, the turnover of some employees may end up saving an organization more money than it would cost to replace that employee. The obvious point is that not all turnover should be avoided—some should be sought.” The question is how to determine which ones to keep and which to encourage to leave. Without accurate measures of costs and values of a worker, good employees may be pushed out along with the “bad” and then the true costs of this action realized by the employer after it is too late.

Last year, Christina Merhar of ZaneBenefits wrote in her blog entitled “Employee Retention – The Real Cost of Losing an Employee,”  “Happy employees help businesses thrive. Frequent voluntary turnover has a negative impact on employee morale, productivity, and company revenue. Recruiting and training a new employee requires staff time and money. According to the Bureau of Labor Statistics, turnover is highest in industries such as trade and utilities, construction, retail, customer service, hospitality, and service.”

“For the costs associated with the loss of 1 or 2 employees, the company can establish a holistic approach to worker selection, development and retention that will significantly lower both turnover rates and turnover costs, AND increase the value of all employees in that job classification.”

“Studies on the cost of employee turnover are all over the board. Some studies (such as SHRM) predict that every time a business replaces a salaried employee, it costs 6 to 9 months’ salary on average. For a manager making $40,000 a year, that’s $20,000 to $30,000 in recruiting and training expenses.

But others predict the cost is even more – that losing a salaried employee can cost as much as 2x their annual salary, especially for a high-earner or executive level employee.

Turnover seems to vary by wage and role of employee. For example, a CAP study found average costs to replace an employee are:

• 16% of annual salary for high-turnover, low-paying jobs (earning under $30,000 a year). For example, the cost to replace a $10/hour retail employee would be $3,328.
• 20% of annual salary for mid-range positions (earning $30,000 to $50,000 a year). For example, the cost to replace a $40k manager would be $8,000.
• Up to 213% of annual salary for highly educated executive positions. For example, the cost to replace a $100k CEO is $213,000.

What makes it so hard to predict the true cost of employee turnover is there are many intangible, and often untracked, costs associated with employee turnover.”

These estimates seem as good as any, given that most of the intangible costs are unmeasured and not tracked.

Merhar refers to a recent article by Josh Bersin of Deloitte on employee retention, in which several other factors are listed when considering the “real” cost of losing an employee:

• The cost of hiring a new employee including the advertising, interviewing, screening, and hiring.
• Cost of on-boarding a new person including training and management time.
• Lost productivity… it may take a new employee 1-2 years to reach the productivity of an existing person.
• Lost engagement… other employees who see high turnover tend to disengage and lose productivity.
• Customer service and errors, for example new employees take longer and are often less adept at solving problems.
• Training cost. For example, over 2-3 years a business likely invests 10-20% of an employee’s salary or more in training
• Cultural impact… Whenever someone leaves others take time to ask “why?”

Employers typically use few or no adequate measure of employee value (after all of the untracked investments are made), so it makes sense that they would not have adequate measures for tracking the costs of recruiting, hiring, exit costs, interviewing, indoctrination, training, lost capacity, impaired customer service, reduced product/service output, administrative costs, loss of gained worker expertise, etc. Yet, some companies are suffering through turnover rates as high as 30-40%. The cost could be debilitating to any organization.

Many experts have offered suggestions on how to reduce employee turnover/improve employee retention. Some seem very common sense yet are over looked. For example, the Wall Street Journal – Leadership Lesson series “How to Reduce Employee Turnover”  listed several tips:

“Here are some ways to lower turnover in your workplace:

• Hiring the right people from the start, most experts agree, is the single best way to reduce employee turnover. Interview and vet candidates carefully, not just to ensure they have the right skills but also that they fit well with the company culture, managers and co-workers.
• Setting the right compensation and benefits is important too. Work with human resources to get current data on industry pay packages, and get creative when necessary with benefits, flexible work schedules and bonus structures.
• Review compensation and benefits packages at least annually. Pay attention to trends in the marketplace and have HR update you.
• Pay attention to employees’ personal needs and offer more flexibility where you can. Consider offering telecommuting, compressed schedules or on-site or back-up day care.
• Bolster employees’ engagement. Employees need social interaction and a rewarding work environment. They need respect and recognition from managers, and a challenging position with room to learn and move up.
• Managers often overlook how important a positive work environment is for staffers, and how far meaningful recognition and praise from managers can go to achieve that. Awards, recognition and praise might just be the single most cost-effective way to maintain a happy, productive work force.
• Outline challenging, clear career paths. Employees want to know where they could be headed and how they can get there. Annual reviews or midyear check-ins are one obvious venue for these discussions, but you should also encourage workers to come to you with career questions and wishes throughout the year.”

The last item is very critical to new-hires. Everyone has experienced the “probationary period” at least at one of their job experiences. Usually 60 – 90 days long, this period is important to establishing the employer’s perception of the employee, and the employee’s perception of the employer. Assuming the right person was selected, if the new-hire has experienced well-organized companies with structured learning opportunities in the past, their impression of the new employer may be negatively impacted by unstructured, ad hoc environments where opportunities to learn, master tasks and assimilate do not seem available. They know that each day that passes, and they have not learned anything new or mastered any tasks that demonstrate their value to the company, the more they are at risk of being terminated for some ambiguous reason.

Additionally, if the employer doesn’t have a program in place to develop employee value, the employer is more apt to not recognize an employee’s increasing value, then use that as a justification to keep wages and benefits low, which means to the employee that the future in this career track is limited. If that employee has skills that are currently marketable, they may immediately begin looking for another job opportunity because they can – but the employees with less marketable skills and more development challenges remain because they are more reluctant to leave.

Managers at all levels must be on the same page if striving to lower turnover and its associated costs. Clearly defining the job classification, with a thorough and complete job/task analysis, will provide the detail to make sure those recruiting and hiring are looking for the people with the right core skills to learn the tasks of the job. The data will make it easier to determine the right starting wage and increments based on the core-skills required and the level of task complexity they will encounter. The data can be used to develop structured, accelerated on-the-job training which quickly engages the new-hire in supervised development, steadily improving worker and departmental capacity which will positively affect morale all around. Worker value, and return on worker investment, will increase and can be easily maintained at a high level.

Setting up an effective human resource development system is far cheaper, far easier and the returns far higher than implementing a patchwork of efforts to an undefined process. It will also help dramatically reduce the rate of turnover and the costs associated with employee loss. For the overall costs associated with the loss of 1 or 2 employees, the company can establish a holistic approach to worker selection, development and retention that will significantly lower both turnover rates and turnover costs, AND increase the value of all employees in that job classification.

Visit Proactive Technologies’ website for more information on our hybrid model for the “accelerated transfer of expertise™. “ Attend one of the live online presentations, or contact us to schedule your own.