The tight job market is concerning to many employers, especially those with high-volume workforces. Unfortunately, all too often, corporate leadership concentrates all its efforts on finding rather than keeping talent.
Instead, they should focus on tracking and addressing employee turnover rates. The cost of employee turnover in terms of revenue, morale and productivity can be staggering, especially when multiplied by hundreds or thousands of employees.
Using employment data, you can calculate the average cost of turnover and discover how it adversely affects your business and your bottom line. Only then can you find cost-effective solutions to improve retention, making your business and workforce thrive.
learn the top 10 causes of employee turnoverdownload our guide on employee retention
why is employee turnover so high right now?
Globally, companies are struggling with increased employee turnover due to changing mindsets among employees and evolving work practises. The pandemic may have sparked the tight labour market in Europe, but the underlying tinder that fuelled the Great Resignation has existed for some time.
According to Gallup's State of the Global Workplace: 2022 Report, job dissatisfaction in Europe is higher than in other regions, with only 14% of employees reporting workplace engagement. Without distinct ties to their organisation, the remaining 86% are at risk of leaving should another opportunity arise or job grievances occur.
changing expectations among workers
Randstad's latest Workmonitor Report surveyed over 35,000 workers in 34 global markets to gather their thoughts on work, life and the balance between them. Here in New Zealand:
- 42% of Gen Zs and 40% of younger Millennials say they have previously quit a job because it didn't fit with their personal life
- over a third of all employees say they would rather be unemployed than unhappy in a job
- 51% of younger Millennials and almost half of Gen Z (48%), wouldn't accept a job with a business that doesn't align with their values on social and environmental issues. This sentiment is shared among Gen X (33%) and Baby Boomers (37).
If your workers aren't feeling a connection to your company, whether through a social cause or fulfilling work, you could be experiencing higher-than-expected employee turnover.
emerging technologies create worker stress
As companies move toward digital and automated processes, employees must continually master new software and technologies and not always to their benefit. For example, a recent poll of workers in Continental Europe found that 36% felt their company's recent technology investments didn't improve their work experience.
It's critical that employers consult workers, especially when it comes to software platforms that directly impact their daily work. Constant communication can help diagnose pain points and ensure your team is on board with adopting technology. In addition, choose an appropriate training format that provides feedback and incentives.
how much does it cost to replace an employee?
To remain productive and solvent, you can't afford to lose employees involuntarily. Data from the Work Institute estimates that each lost employee costs the company, on average, one-third of their annual salary.
Gallup puts the figure even higher, placing the value of a satisfactory replacement employee as equal to one-half to two times the original employee's salary. As a result, if your business is struggling with employee retention, it can significantly affect your bottom line and damage your company's brand in the process.
To accurately estimate how much it costs to replace an employee in your organisation, you must consider direct and indirect costs (and even some intangibles).
the direct cost of hiring an employee
The most obvious factor in calculating turnover expense is the cost associated with new talent acquisition. Depending on your recruitment process and the employee tier level, you may have any or all of the following outlays:
- ad placements
- recruiting agencies
- temporary and contingent workers management
- HR and manager salary allotment to screen and interview prospects
- travel and moving expenses
- signing bonuses
- cost of onboarding a new employee, including training, equipment allocation and technical set up
Looking at the above expenditures, you can see a decided advantage to hiring internally. You most likely have an internal job posting site and can eliminate much of the background screening and new-hire onboarding. In addition, you already have a record of the employee's job performance and probably a good idea of their skills and assets.
Regardless of whether you hire internally or externally, you can't afford to let good talent drift out your doors. Especially when there are ways to address the problem. In addition, direct costs represent only a portion of employee turnover costs.
identify the root causes of employee lossdownload our guide on the top reasons for employee turnover
the indirect cost of losing an employee
When management considers turnover costs, they often overlook indirect expenses, which admittedly can be difficult to measure. However, according to the Work Institute, soft costs can account for over two-thirds of the cost of losing an employee and may leave lasting damage in the form of brand and morale erosion.
When even one employee leaves an organisation, you experience a decrease in productivity and continuity. If your talent pool resembles a swinging door with workers coming and going regularly, you're looking at a significant decline in service or production. Missing deadlines can make obtaining and keeping clients challenging and seriously affect cash flow.
Productivity lags when a workforce is incomplete. However, even after replacing missing workers, getting the new hires up to speed takes time, resulting in continued subpar performance. Consider these hidden costs of training employees:
- loss of work time due to onboarding processes, including payroll, equipment and credentials
- on-the-job instruction
- correction of mistakes
- slower than usual performance due to unfamiliarity with equipment and procedures
In addition, each of the above situations requires input or help from current employees, thereby reducing their overall productivity. The Society for Human Resource Management speculates that a comprehensive onboarding programme including orientation and mentoring can last 12 months.
The process is even lengthier when replacing high-level leaders. McKinsey found that new executives can take over a year to build trust, implement strategies and assemble a team.
Losing a coworker can be traumatic to current employees, especially if they had a long-term or particularly friendly relationship. Sometimes, people spend more time with their work cohorts than with family or friends. The employee left behind may feel bitter that the company didn't do more to keep their coworker or discouraged that they must train and get to know a new individual.
In addition, resignations can be infectious, with other employees wondering if better opportunities are available elsewhere. If the employee that left remains in contact with their past colleagues, they may spur others to jump ship, especially if the move has been positive.
depletion of knowledge
When employees leave, they take with them a vast store of knowledge — from something as minor as which IT staff member is most efficient at solving platform bugs to how to load and operate a finicky machine correctly. Hospitality and sales industries rely heavily on personalised customer service, and the loss of a valued staff member can contribute to client attrition as well.
If your company offers training and development opportunities, a must in today's competitive job market, you'll also lose money spent on employee improvement. In fact, every dollar you paid to shape and foster that employee will now benefit their future employer.
A high employee turnover rate can be detrimental to your company brand. Social media has made it easy for prospective employees to research all aspects of an organisation, including its reputation as an employer.
While an occasional disgruntled employee complaint may be invalid, you should be concerned if most of your previous employees leave negative reviews. Eventually, you may find it difficult to attract worthwhile talent, creating a vicious cycle of poor prospects, unhappy employees and a shrinking retention rate.
If, on the other hand, you have a workforce filled with tenured, satisfied employees, you'll experience a more positive workplace. And by focusing on in-house recruitment to fill positions, you can retain your employees' trust and fill roles with proven winners.
how much does it cost to replace an employee?
While replacement costs vary depending on the position and employee level, you can perform a turnover cost calculation by factoring in your turnover ratio and average annual salaries per type of employee.
- Start with measuring your turnover percentage per a set period. For example, divide the number of workers who left your employment last year by the average number of employees you had during that year. You may want to use Full Time Equivalent (FTE) figures if you have a lot of part-time employees.
- Once you have your employee turnover rate, track it monthly, quarterly or annually to detect undesirable trends. You can also compare your rate to others in your industry and country to ensure you're in line with competitors.
- Next, designate types of employees, either by salary or duties. For instance, you may have production workers, management and top-level leadership staff.
- Gather input from your HR team and managerial staff to identify replacement costs per position, and represent these costs as a percentage of salary. For example, you may be able to replace a production worker for 35% of their annual salary, while a Chief Financial Officer may run considerably more.
Finalise your calculations for each type of employee by multiplying the annual salary by the replacement cost percentage and then by the number of new hires necessary to accommodate your turnover rate. The resulting figures may alarm you and cause you to rethink employee retention strategies completely.
reducing employee turnover costs
Once you've taken a good, hard look at what your employee turnover is costing you, it’s time to do something about it. While you may have to reprioritise time and money investments, improved employee retention is an attainable goal and one worth pursuing. Follow these tips for proactive retention management.
- find out why your employees are leaving through exit interviews
- collect feedback from current employees to discover pain points and successes
- be willing to adapt to help employees engage and grow within your company
- enhance your employment packages to remain competitive
Look at what other companies are doing to promote employee engagement and, subsequently, worker retention. For example, corporate goals of inclusivity and global sustainability help empower your employees, letting them feel they're making a difference. In addition, find ways to increase job flexibility so employees feel they have some control over when and where they work.
Don't let the costs of recruiting, training and onboarding new employees drive you out of business. Instead, discover ways to support your workers through career advancements within your company. A productive staff of long-term workers can reap benefits way beyond profits.