How Much Is Employee Turnover Actually Costing You?

Tell me if this sounds familiar: “Hey! Welcome to [insert company name here]. My name is [insert name here]. How’s it going? I’ll be showing you around today, and I’ll be training you for the next month.”

How many times do you or your managers have to make these kinds of introductions? For your sake, I hope it’s not that often.

When I was working in the service industry, this happened on a weekly basis. I enjoyed working with my coworkers, but I didn’t like that most of them would leave within a few weeks or months; I rarely had the chance to get to know them well.

In the retail, service, manufacturing and hospitality industries, seeing employees leave and new ones hired is a monthly, weekly or even daily reality; these industries are known for their high turnover rates. People come and go, sometimes so quickly that you don’t even get a chance to get to know their name!

Whenever you quit a job, either voluntarily or involuntarily, most of the time it’s not a matter of celebration. If you’ve left voluntarily, it feels bad to leave the coworkers you’ve developed close relationships with, or in the case of a firing, it feels equally bad to know that your performance wasn’t up to par. Not to mention that you are now jobless.

It’s not fun for businesses, too.

What exactly happens when a business loses an e­­­mployee?

Josh Bersin, founder of Bersin by Deloitte, gives a detailed overview; here I’ve listed the costs associated with each component:

  1. You lose an employee: What do you lose?
    Time spent conducting exit interviews
    Money spent on exit interviews
    Money spent on various required costs (including unemployment compensation, severance pay, etc.)
  2. You must search for a new hire: What do you lose?
    Time spent searching for the new hire
    Time spent waiting for responses
    Money spent on overtime pay for those employees covering for the lost
    Money spent on recruiting efforts and services
  3. You must evaluate the candidate(s): What do you lose?
    Time spent interviewing the candidate
    Money spent on the person(s) doing the interviewing (HR service) or outsourced headhunter
  4. You must onboard the new hire: What do you lose?
    Time spent onboarding the hire
    Money spent on the onboarding: onboarding services, employees and/or consultants
  5. You must train the new hire: What do you lose?
    Time spent training the hire
    Money spent on the training: training services, employees and/or consultants
    Money spent on the employee that is training instead of being productive

Additional costs:

  • Lost productivity:
    Your new hire won’t instantly match the level of productivity of your other, more experienced employees. Depending on the industry and the nature of the tasks at hand, it may take anywhere from several weeks to several months for the new hire to reach your desired productivity level.
    There is lost productivity when existing employees are asked to stop their current work and train/onboard the new hire.
  • Culture decline:
    Whenever an employee leaves your business, the rest of your staff is affected. This is true even if the employee left for reasons unrelated to his/her experience of the job. It sends an indirect message to the rest of your staff (and to the outside world) that leaving the company is a regular occurrence (and therefore not a big deal) and/or that many of the employees are unsatisfied in some way or another. If the employee left specifically for reasons related to the job experience (i.e. they had a bad work experience), the effect is amplified.When someone leaves because of a negative work experience (e.g. poor work conditions, experience of mistreatment, in-house conflicts, lack of appreciation, etc.) the word goes around and quickly everyone knows why. Before you know it, your entire staff is gossiping about the way the company treats its hires, creating even more bad will amongst your staff which can be devastating for your business.
  • Threat of domino effect:
    In most cases, the people who leave your company will still remain in contact with your current employees. Because of this, ex-employees of yours may communicate job opportunities to your current employees, and in the process cause even more of them to leave your company. This is especially true in the cases of an employee leaving because of a bad work experience.

This graph is helpful to visualize all the points mentioned above:

Fig 1: Economic Value of an Employee to the Organization over Time (C) Bersin by Deloitte

This graph shows the value of an employee to a company, over time. You can see that initially, a new hire is costing your company money; only after onboarding (and in some cases, training) does the new hire start contributing value. Over time, the employee will provide increasing value, and eventually peak. Whenever an employee leaves or is let go, the cycle begins anew.

In an industry with high turnover, the graph may actually look more like this:

This graph, made by yours truly, is more realistic for businesses in high-turnover industries because it shows the long-term effects of turnover.

  • The orange line represents a business with a high retention rate (in this case, the business does not lose any employees during the time period shown).
  • The blue line represents a business with a high turnover rate (in this case, the business loses 4 employees during the time period shown).
  • The section outlined in red represents all the potential value that is missed.

You may be wondering, ‘Why is there a period of lowering value before an employee leaves the company’? This is because in the cases of employees leaving on their own, there is almost always a period of lowering interest in the work before they leave, and lower interest means lower productivity; this is to be expected since it’s hard for an employee to see their work as meaningful knowing that they will be leaving very shortly. In many cases, this period of lowering interest and productivity starts well before an employee decides to leave.

The period of no-value shown in the graph represents the time between which an employee leaves and a new candidate is hired. Obviously, during this time no output is being produced, and the company is losing money through recruitment spending, overtime pay, and others; the longer this period lasts, the higher the cost incurred by the leaving employee.

To put these figures in more relatable terms: Studies show that the total cost of losing an employee ranges from tens of thousands of dollars to 1.5-2X annual salary. For 1 employee salaried at 50 000$/year, that’s 75 000 to 100 000$ lost right there. Are you prepared to lose that much money?

For a more precise estimate of the costs of turnover for your company, check out this source.

All in all, I hope I’ve convinced you to start taking your employee turnover rates seriously (if you haven’t already). That being said, it’s also worth looking into the causes of turnover in your business and what can be done about it.

 


References

Bersin, Josh. “Employee Retention Now a Big Issue: Why the Tide Has Turned.” LinkedIn Pulse, Bersin by Deloitte, 16 Aug. 2013, www.linkedin.com/pulse/20130816200159-131079-employee-retention-now-a-big-issue-why-the-tide-has-turned/.

 

 

 

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