The following text is an excerpt from “Small Business Employee Benefits and HR Blog” by Christina Merhar. The entire post can be found at:
The Cost of Employee Turnover
Studies on the cost of employee turnover are all over the board.
Some studies (The Society for Human Resource Management (SMHR)) predict that every time a business replaces a salaried employee, it costs 6-9 months’ salary on average. For a manager making $40,000 a year, that’s $20,000 to $30,000 in recruiting costs and training expenses.
But others predict the cost is even more – that losing a salaried employee can cost 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 (link below) 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 $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 are the many intangible and, often, untracked costs associated with employee turnover.
So, what is the real cost of losing an employee?
In a recent article on employee retention, Josh Bersin, of Bersin by Deloitte, outlined factors a business should consider in the calculating “real” costs of losing an employee. Those factors include:
- The cost of hiring a new employee including the advertising, interviewing, screening and hiring.
- The cost of onboarding a new position including training and management time.
- Lost productivity… it may take a new employee 1-2 years to reach the productivity of an existing employee.
- Lost engagement… other employees who see high turnover and tend to disengage and become less productive.
- Customer service and errors; for example, new employees take longer and are often less adept at solving problems.
- Training cost. Over 2-3 years, a business is likely to invest 10-20% of an employee’s salary or more in training.
- Cultural impact… Whenever someone leaves, others take time to ask “why?”.
One of the reasons the real cost of employee turnover is an unknown is most companies don’t have systems in place to track exit costs, recruiting, interviewing, hiring, orientation and training, lost productivity, potential customer dissatisfaction, reduced or lost business, administrative costs, lost expertise, etc. This takes collaboration among departments (HR, Finance, Operations) to measure these costs and reporting mechanisms.
Best practices on employee retention
So, what can you do about employee retention? We recently outlined seven tips fo employee retention (see link below). Some of these employee retention tips include:
- Benchmark your employee retention rate.
- Use proven retention strategies, not guesswork.
- Don’t assume employees are happy (create a high-feedback environment).
- Implement a health benefits program such as traditional health plan or defined contribution health benefits (see link below).
- Provide different benefits for different employees (focusing on the high-value, expensive to replace employees).
- Conduct exit interviews.
CAP (Center for American Progress) Study “There are Significant Business Costs to Replacing Employees:
Josh Bersin – “Employee Retention Now a Big Issue: Why the Tide Has Turned”:
Zane Benefits “Seven Tips for Employee Retention”:
Defined contribution health benefits: “What Are Defined Contribution Health Plans?”: