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What is the cost of employee turnover?

David Bator
by David Bator on August 12, 2014

brafton100What is retention really about? In the end, it comes down to the profitability and success of your organization. And we're not just talking nickels and dimes. Preventing talented workers from leaving your company by fostering an attractive workplace environment and developing a strong talent management strategy translates into thousands of dollars per employee, and billions for the economy as a whole.

So what does employee turnover cost? 

Many employers overlook the drastic impact employee turnover can have on their bottom lines. Although some organizations have processes in place to recruit, hire, train and transfer team members to fill empty roles, the fact remains that a significant amount of time and money goes into these activities. Furthermore, knowledge loss can set companies back significantly, requiring an extended period of time to recover - if they restore specific expertise at all. Changes in staff can negatively impact morale, even leading to downward spirals of additional employees leaving as their workplace communities dissolve or they feel burdened by needing to pick up the slack in someone's absence.

Numerous studies have revealed the deep impact these issues have on the financial well-being of organizations. Although the cost typically varies based on the position, replacing an employee almost always requires a substantial investment of time and resources. According to Inc.com, it costs up to 150 percent of an employee's annual paycheck to replace him or her. 

In its overview of the high costs of terminating employees, Paychex.com emphasized that there are both direct and indirect expenses:

Direct costs include:

  • Upholding requirements such as COBRA or state continuation guidelines
  • Paying severance packages and accrued time off
  • Hiring temporary employees
  • Recruiting and interviewing to fill the opening
  • Giving employees overtime pay to cover the former worker's tasks

Indirect costs include:

  • Lost morale among remaining workforce
  • Productivity loss
  • Reduced quality of products and customer service
  • Damaged relationships with clients
  • Harmed industry reputation and business positioning
  • Hindered innovation
  • Missed opportunities to acquire new clients

The costs don't end with these lists, either. A few others include training expenses, loss of knowledge or specific skill sets, and strategies such as hiring staffing agencies or referral bonuses. Each element adds up to a significant overall burden caused by each worker who leaves the organization.

How common is worker churn? 

These expenses can add up quickly, especially for organizations that frequently have to deal with departures and new hires. The United States Department of Labor Bureau of Labor Statistics put the national turnover rate at 3.2 percent as of May 2014. Without a strong talent retention strategy and attractive company culture, many companies exceed this percentage, and enterprises struggling to prevent turnover must face financial consequences.

Furthermore, a greater number of workers are thinking of leaving their jobs than this figure seems to indicate. In fact, a recent CareerBuilder study revealed that 21 percent of workers were planning to leave their positions, with only 59 percent satisfied at their place of employment. This means that even if these employees don't make an exit immediately, they're likely to do so in the future and are usually far from engaged and motivated within their current positions.

What can you do to turn job retention into a core strategy? 

Companies with low turnover rates enjoy the benefit of an experienced, committed workforce in addition to avoiding the costs associated with replacing employees. How do they get there?

For starters, it's important to understand why people leave. The CareerBuilder survey found the following factors among the top reasons employees think of making a career change:

  1. Dissatisfaction with their jobs
  2. Insufficient advancement opportunities
  3. Poor work/life balance
  4. Underemployment
  5. High stress levels
  6. Negative opinion of boss's performance
  7. Feeling of being overlooked for promotion

According to a recent survey by Human Resource Executive, strategies commonly associated with employee engagement - such as increasing communication - are key priorities for retention strategies. Respondents to the survey indicated that they planned to give significant attention to employee relations.

"From intranet blogs to town-hall meetings to small-group executive-summary sessions to 'breakfast with the CEO,' we try to carve out new opportunities for employees to receive information," said Kristin Dickey, senior vice president of human resources and organizational development at SquareTwo Financial, according to the source. "We also formally and informally solicit feedback from our employees as to areas of interest, ways to improve our culture and areas where we are performing exceptionally well."

A host of other studies have pointed to similar correlations between engagement and retention, and it just makes sense: Workers who are engaged in their roles are more likely to feel committed to their companies, passionate about their projects and attached to their co-worker communities. For example, the CareerBuilder survey noted that workers who were planning to stay expressed sentiments such as "I feel valued and my accomplishments are recognized" and "I like the people I work with."

That's why boosting engagement is a critical component of avoiding high turnover rates. Talent management strategies with this goal in mind mitigate the key issues that cause talented workers to walk out the door.

8 stay interview questions

David Bator
Written by David Bator

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