Cost of Turnover

Why Is Employee Turnover So Expensive?

By George Dickson on April 29, 2015

Do you know how many employees you lose each year?

Most companies keep track of this, but many fail to put it into context and quantify it in a way that is meaningful to everyone. Let's do that:

Do you know how much that employee turnover costs you each year?

You probably track the cost of an ad campaign, new hardware, or a workspace with great accuracy; but many organizations fail to realize the full extent of the cost they're paying to turnover. It's a cost that has few if any visible benefits, and it's larger than you might think. Try running a quick baseline cost-benefit analysis on losing employees. I'll wait.

It's fairly common knowledge that retaining employees is less expensive than replacing them, but many of the less obvious costs associated with employee turnover add up outside the standard balance sheet, and they add up shockingly fast.

Why is Employee Turnover Expensive?

Part of what makes employee turnover so expensive is that it affects multiple areas of your business. Some of these areas are easy to measure, and others are a bit harder. Here are a few examples of typical employee turnover costs, and some others you might not be aware of:

Recruitment Costs

Job posting ads aren't cheap. For example, at the time I'm writing this, a single 30-day ad on LinkedIn costs nearly $500. If you have to recruit 10 employees a year due to attrition, that's $5,000 right there. Then you need to consider the opportunity costs associated with dedicating a portion of your workforce to screening and interviewing new candidates. Already feeling a bit overwhelmed?

Lost Productivity

When an employee leaves, that employee no longer produces. If your employees produce just twice their annual salaries each year (some employees produce at a higher rate than 2X their salary), these productivity losses are already worth mitigating.

For example: the productivity value of an employee who earns $75,000 and produces twice her salary would be $150,000 per year ($12,500 per month). If it takes two months to replace that employee, you will have incurred $25,000 in lost productivity costs alone.

Training and Onboarding Costs

After hiring a suitable replacement, the new employee requires training. It may take several months — or much longer  for the new employee to "ramp," or begin producing at the same level as the former employee.

Nearly any employee is going to require assistance from their colleagues during that period, and that assistance demands its own opportunity cost. Every minute a co-worker spends training a new employee is a minute they're not producing work in their own position.

Exit Costs

While you won't generally have severance costs for employees who voluntarily leave, it's not uncommon to cut a check for accumulated vacation time and unused sick time.

If you do fire an employee, exit costs are often considerably higher.

Loss of Morale

When employees leave, those who remain feel the impact. They are often tasked with more work, and they may question their own reasons for staying.

If just one employee follows the original exiting employee's lead, your employee turnover costs just doubled.

What You Can Do to Reduce Employee Turnover Costs

The first step in reducing your employee turnover costs is understanding. We built a tool to help you get started on calculate the cost of employee turnover based on: team size, attrition rate, annual salary, and annual productivity value.

Though you may be shocked at the annual cost of employee turnover at your business, take a deep breath and consider this a wake up call. There's no need to take a glass-half-empty approach with this information. You have the opportunity to save your company a significant amount of money each and every year by focusing on improving your attrition rate.

Now that you know what's at stake, you'll need to determine WHY your employees are leaving. We recently published Turnover: Why Your New Hire Just Quit, which covers some key reasons why employees leave a company. It's a great place to get started. You can also check out employee survey tools like TINYpulse, which can help you better understand your team, and avoid that surprise resignation.

Once you know why employees are leaving, you can take measures to fix the problem. Think about ways you can improve morale, build a culture of recognition, and stay receptive to feedback in order to improve the work environment your current employees are in. Peer recognition tools like Bonusly are a great way to help build a strong environment of appreciation and positive feedback.

When you consider the actual cost of losing employees, the time, effort, and resources dedicated to retaining them pale in comparison. So, take another look at our cost of turnover calculator and instead of thinking about how much you're likely losing to turnover, think about how much you'll save by improving retention.

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Written by George Dickson

George Dickson

George manages content and community at Bonusly. He's dedicated to strengthening organizational cultures through thoughtful leadership and frequent recognition.