What Was Management Thinking? The High Cost of Employee Turnover

Apr 22, 2015

An article from Forbes made the rounds last summer with some pretty startling statistics:

  • The average raise an employee can expect is 3 percent, but given the cost of inflation, it actually amounts to more like 1 percent in additional spending power.
  • If an employee leaves a company, however, they can look forward to a 10-20 percent increase in salary. In extreme cases, they may even see as much as a 50 percent bump.

In other words, we’ve cultivated a system in which employees who are loyal to their companies are financially punished and those who jump ship every few years are financially rewarded.

What turnover really costs

The cause? Well, one culprit is certainly antiquated HR tactics that only allows raises as a certain percentage of the employee’s current salary, regardless of external market conditions. Others argue that employers are not equipped to rapidly promote, develop, and reward their employees in ways that aren’t simply monetary.

But regardless of the reason, what this information exposes is a fundamental lack of understanding about what turnover really costs an organization. When you consider all of the costs associated with employee turnover – including interviewing, hiring, training, reduced productivity, lost opportunity costs, etc – here’s what it really costs an organization:

  • For entry-level employees, it costs between 30-50 percent of their annual salary to replace them.
  • For mid-level employees, it costs upwards of 150 percent of their annual salary to replace them.
  • For high-level or highly specialized employees, you’re looking at 400 percent of their annual salary.

The costs of turnover adds up fast

Let’s play a game called “Fun With Math.” A business loses 12 employees in one year, averaging one per month.

  • Six of these employees were entry level, with an average salary of $40,000. It costs, on average, $16,000 to replace each employee at 40 percent of their annual salary, for $96,000 total.
  • Four of these employees were mid-level, with an average salary of $80,000. It costs, on average, $120,000 to replace each employee at 150 percent of their annual salary, for $480,000 total.
  • Two of these employees were senior, with an average salary of $120,000. At 400 percent of their annual salary to replace them, you’re looking at almost $1 million, specifically $960,000.

Add everything up and you’re looking at costs of over $1.5 million to replace just 12 employees. Numbers seem high? Fair enough – there are organizations that estimate replacement costs to be lower.

The conservative estimate is pretty bad, too

So let’s cut the cost of replacing all of those employees to the lower end of what it costs to replace an entry-level employee – 30 percent – across the board. Here’s how it breaks down:

  • It’s going to cost your company $72,000 to replace the six entry-level employees.
  • It’s going to cost your company $96,000 to replace your four mid-level employees.
  • It’s going to cost your company $72,000 to replace the two senior employees.

That means that at the absolute lowest estimated end of the spectrum – your best case scenario – you are looking at almost $250,000 as the cost of the turnover of just 12 employees.

If your company has a quarter of a million dollars that it can just light on fire at the next office BBQ social activity, then maybe you don’t really need to invest in these areas. But my guess is that the vast majority of companies are simply not in that position. It costs less to retain than it does to replace.

When a raise is really an insult

I once had a job where I had experienced an absolutely miserable working environment for months. At the same time, I had been able to advance a number of initiatives that had made a real impact, and I’d been able to do it with an absurdly small budget – one that was less than 0.5 percent of what the company thought it would take to outsource the same project.

I knew it, and the company knew it. They wanted to keep me there and working, and to reward me for my efforts in a miserable working environment, I received a $2,000 raise. This amounted to less than 3 percent of my overall salary, and was so small that I barely noticed the difference in my paycheck.

I didn’t ask for the raise and, frankly, wasn’t really expecting it. But when I received it, it did more to reinforce how little the organization valued me than it did to increase my morale. I had saved the company hundreds of thousands of dollars, and simple math told them that it would cost, with a conservative estimate, 50 times the amount of the raise to replace me.

Think they could have dug a little deeper into those pockets for a raise that would have made me feel valued and appreciated and still have made a good business decision for the organization given the cost to lose/replace me? Of course they could have.

Time to change the conversation

So, it’s time to start taking the costs of employee turnover into consideration. When you factor in those costs, it changes the conversation about how the organization approaches compensation, benefits, training, development, engagement, and morale.

It can be expensive to invest in these things without a direct line to return, but it costs significantly more to lose your best employees when they jump ship for a few thousand more dollars over the course of the year.

This was originally published on Zen Workplace.