The Real Cost of Employee Turnover

Posted by · July 23, 2012 3:37 pm

When one calculates how much a business loses when an employee leaves the company, a few obvious answers immediately come to mind. Among those expenses are the costs of recruiting a new employee, training that employee, as well as any costs associated with severance of the former employee. However, these are not the only costs associated with such a stressful part of doing business. This is of particular importance to small and even medium-sized businesses that already operate on far slimmer budgets than their larger counterparts.

The best way to categorize these turnover costs is to break them into two separate groups: direct costs and indirect costs. Located within these groups are several costs—some familiar, others not so much—all of which warrant the concern of any business owner looking for ways to cut unnecessary costs, increase productivity, and cultivate long-term, sustainable profitability.

Direct Costs of Employee Turnover

Separation Costs

This is one of the more obvious costs associated with losing an employee, or at least one would think so. Severance packages, extended benefits, even exit interviews—all of these costs (and several others) have real dollar amounts attached to them. However, according to some, these costs are the ones most likely to be overlooked when employee turnover matters are at issue.

While the appropriate costs to consider vary depending on the nature of the separation—voluntary or involuntary termination—there are a number of real costs that must be considered right away when calculating turnover costs. As a result, the necessity of hiring and retaining quality staff is made clear long before other, more subtle costs are acknowledged.

Recruitment Costs

The next type of direct costs to consider when dealing with employee turnover are those associated with replacing that employee. This includes any advertising the company may need to run, employment agencies hired to help find the right candidate, as well as any monetary incentives paid to an employee who refers the right candidate to fill the position. If the company is large enough to have a hiring department, these costs also include the time spent collecting, processing, and responding to resumes, as well as interviewing potential hires and conducting other pre-employment tests screenings. If the employee is not local, the company may also cover relocation expenses.

Bearing in mind that each component of the recruitment process can be quite costly, it is not surprising that an effective recruitment effort—which typically involves more than one of these tools—can be quite costly.

Training Costs

The final direct cost to keep in mind is that of training. Even once the right person is found to fill the job vacancy, there still remains a need to equip that individual with the necessary skills and knowledge of the business to act as a suitable replacement for their predecessor—or to bring them “up to speed.” Training costs include the cost of orientation, which is best calculated as a percentage of the new hire’s salary during the orientation period, as well as the cost of the trainer(s). Training materials, including company handbooks, instruction manuals and other equipment are another noteworthy training cost.

With that in mind, it is easy to see how replacing an employee can cost a company into the tens of thousands of dollars. And that’s only in direct expenses.

Indirect Costs of Employee Turnover

Lost Productivity Costs

The costs of lost productivity can be particularly devastating if the position at issue has to do with the sale or assembly of the product or service that the company provides. Addressing this phenomenon, known as slippage, Gwen Moran of business site Entrepreneur writes, “When an employee is missing, the work that isn’t getting done has a price attached to it…Lost sales, production delays and lags in new product introductions all cost your company money.”

While these costs aren’t accounted for the same way as a direct expense, getting an idea of the loss of potential revenue caused by employee turnover is essential to the understanding of just how influential a single staffing change really is.

Company Morale Costs

“Turnover has an impact on the peer group,” Moran continues, “as well as the management chain, making everyone else less effective.” Although this cost might also fit well within the category covering lost productivity, this is another turnover cost that doesn’t exactly make itself clear on the final balance sheet.

When faced with the loss of a co-worker, both psychological and workload factors often impair the performance of remaining staff. As a result of such a “ripple effect,” lost productivity has the potential to account for significantly more than the work originally covered by the lost employee. It can also cause companywide setbacks for management if the blow to morale is significant enough.

Reputation Costs

When an employee leaves—especially a high performer—managers and coworkers aren’t the only ones to notice the change. Customers notice too. This is especially true of staff that is customer-facing, particularly sales and customer service. If the loss of an employee results in a subpar experience for the customers that employee used to serve, they may simply choose to take their business elsewhere.

“When a knowledgeable employee leaves, taking experience and customer service ability with him or her, that can have an impact on customer satisfaction,” Moran rightly observes.

If the problem persists long enough after the outstanding employee leaves, the credibility of management—and event the company itself—can also be placed at risk. This is particularly true for smaller establishments. A failure to appropriately respond to the loss of one employee could quickly result in the mass exodus of customers and staff alike—a potentially life-ending predicament for a small business on a limited budget.

It is clear, then, that being aware of all costs associated with employee turnover is critically important not only to the minimization of staffing expenditures associated with that process, but also to the sustainability of any successful business.

By ensuring that appropriate investment is made in recruiting, training and, most importantly, retaining the right employees, companies can mitigate the indirect and direct costs associated with this part of doing business. In turn, such cost savings reaped by this approach ultimately translates into increased productivity and long-term profitability for that business.

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