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How to Calculate the Real Turnover Cost of Your Employees

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September 26, 2022Hiring

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Excessive employee turnover can be expensive for your company — even without the costs, it can cause all sorts of problems (like destroying your employer brand and causing your reputation to take a nosedive), so it’s important to take the issue seriously. 

With that in mind, let’s discuss employee turnover costs, how to calculate them, and the hidden expenses that this insidious problem can lead to. Read on to find out how you can reduce employee turnover before it kills your bottom line.

Defining Turnover Cost

Broadly speaking, turnover cost comprises two things. First, the cost to actually hire a new employee — including any marketing or recruiting costs leading up to the hire.

Second, it also includes expenses associated with getting them up to speed. Training costs and lost productivity are two obvious costs, but there are others: costs for sending equipment to remote workers, costs to pay for fellow team members to pick up the slack, etc.

Every dollar spent on recruitment, training, and maintaining productivity is part of your total turnover cost.

How Much Does it Cost to Turnover a Typical Role?

While turnover costs vary greatly depending on factors like the industry and even the employee’s seniority level, it’s an expensive process across the board. For entry-level hourly workers, turnover costs can amount to $1,500 per employee. For technical and supervisory positions, the cost jumps to 100-150% of the employee’s salary. Executive positions can cost 213% of the individual's salary.

With numbers like this, it’s not hard to see why it pays to retain employees.

When Turnover Is a Good Thing

Turnover comes with negative connotations by default — but sometimes, it can actually be a good thing for your company and for the outgoing employee. For example, everyone is better off when a team member exits before they start to stagnate.

The challenge is differentiating between healthy turnover and turnover that has a demoralizing effect or in some way damages your bottom line — as can be the case when you face issues like a mass exodus.

How Do You Calculate Turnover Costs?

Turnover isn’t a once-and-done cost. Several factors go into the real cost — and we’ll take a look at these below.

Expenses Before Leaving

It’s unfortunate but true: Productivity usually takes a nosedive once a team member decides to leave a company. You’ll need to figure out the monetary cost — not just in terms of less work being done, but also the costs to pay supervisors and coworkers to pick up the slack.

To calculate it, create a spreadsheet. List “outgoing employee” in the first row, “coworkers” in the second row, and “supervisors” in the third row.

The first column of your first spreadsheet is the number of weeks before your employee leaves. The second column is the hours of lost productivity. The third column is for weekly salaries.

To calculate, multiply the number of weeks before departure by the number of hours per week, then multiply that total by the hourly salary for each line. Calculate the total for each line.

Example

Let’s say that your outgoing employee is retiring and plans to take a few half days as they transition out of the role. They’ll take four half-days from work, meaning that this team member will miss at least 16 hours of work compared to their coworkers.

You’ll need to reimburse the coworkers picking up the slack — which can mean not only paying them the base hourly rate (if you have an hourly pay structure), but also overtime costs, too.

Ongoing Vacancy Expenses

Enter the amount of time you think you’ll need to hire a new staff member in the first column of your next spreadsheet. In the next column, write down the hours per week a team member will need to fill in the vacancy while you search for a new team member. The third column is hourly pay for that employee. Multiply the columns together, and then add them up to find the total cost for the ongoing vacant position.

Example

Imagine that a specialist on your team gives their notice. You roll into action and start the search to fill the position. In the meantime, the existing team member’s final day at work comes and goes — but because they have such a specialized skill set, you’re still doing assessments to find the right replacement.

The former team member’s position stands vacant for at least a couple of weeks while you or your recruiting agency interviews candidates. Then, when you do choose someone, the new team member needs time to give notice at their current company, which means it’ll be a couple more weeks before the vacancy is officially filled. 

If you have an hourly pay structure, you’ll need to compensate other team members for extra hours as they shuffle their schedules to fill the gap as best they can. If your employees are salaried, you may need to consider offering alternative compensation or bonuses for the extra work.

Training Expenses

To calculate this, create a new spreadsheet:

  • In the first column, list the number of weeks it’ll take to train your new recruit.
  • In the second column, list training hours per week.
  • In the third column, list hourly pay for each employee.

Multiply all the figures together, and then add them up.

Example

Your new employee will start at $25 per hour and will be training for the first three months. Each week, they will attend two two-hour training sessions for a total of four training hours per week. That works out to 48 training hours — and at $25 per hour, you’ll invest $1,200 in wages.

Administrative and Hiring Tasks

Administrative tasks include the costs associated with recruiting human capital — like separation processing, advertising, and resume screening. On a spreadsheet, list all the tasks your business has to do to hire a new employee in different rows.

You’ll have two columns: Hours per employee and hourly pay.

Next, list the amount of time spent on each hiring task and the hourly pay for the employee completing that task. Add up the hours that the employee spends on hiring tasks, then multiply them by their hourly wage.

Example

Your human resources director is working hard to fill a position. This includes:

  • One hour writing a job ad
  • Four more hours placing ads on job boards and social platforms
  • Two hours conducting exit interviews and exit processing

All told, that’s at least seven hours — and that’s just the basics. When it comes to reviewing resumes, doing background checks, scheduling and hosting interviews, etc., you’ll pay for many more hours of work devoted to administrative and hiring tasks.

Other Hiring Expenses

This would be the section of your spreadsheet to list all other hiring costs that haven’t been listed elsewhere — and there will almost always be additional costs. Consider things like benefits or workplace integration, for instance.

Example

Congratulations — you’re currently onboarding a great new employee.

Now, what costs haven’t you factored?

For starters, what about fees for background checks? Also, your human resources director will need to spend several hours explaining and setting up healthcare and other benefits programs. 

You want the new employee to get off to a great start, you organized a lunch mixer so that everyone can mingle. The catering is a cost you’ll need to track.

Don’t forget to tally up the company swag you’ve provided to the new employee. While coffee mugs and t-shirts are small (but welcome) gestures, they do come with a cost that you must count.

Then there’s the time your IT team will spend disabling your former employee’s accounts, plus the time they’ll spend setting up new accounts and hardware for the new hire.

You get the idea. There are lots of easily overlooked costs to account for throughout the hiring process.

Total Cost of Turnover (Per Employee)

Once you’ve collected the metrics and costs above, the final step is easy: Just add the costs above to determine your total cost of turnover per employee.

Step-by-Step Guide for Determining the Turnover Cost

Now that you know how to calculate the turnover cost for one employee, what about the average costs for multiple turnovers over time? All companies have an annual turnover rate, and you’ll need to factor in that plus the costs to keep your company competitive.

1) Clearly Define the Time Period You Want to Analyze

At a minimum, you should calculate turnover annually since it will be a part of your company’s yearly budget. This means starting on January 1 to calculate the entire year. Depending on your organization's workflows, you may also want to calculate monthly or quarterly, but be sure to define these time periods ahead of time.

2) Collect Data on the Average Number of Employees for a Decided Time Period

Next, collect a couple of numbers from payroll. You’ll need the number of employees you had on the first day of the period, and the number on the last day. Add these two numbers together and divide by two to get your average number of employees.

3) Keep Count of Every Employee's Departure

Next, you’ll need the total number of employees who have departed. This includes people who resigned as well as terminations. However, don’t include people on vacation, FMLA, maternity leave, or other types of temporary leave. These people are still employees even though they may not be active at work currently.

4) Determine Your Turnover Rate

Here’s the calculation for your turnover rate:

Turnover rate % = [(Number of departures) / (Average number of employees)] x 100

5) Research Your Industry and Compare Your Turnover Rate With Other Brands in Your Field

You’ve got your turnover rate — now what? Is it normal, too high, or too low?

There’s no set answer to that question. Every industry is different — sometimes vastly so. Look at your direct competitors to get a sense for their turnover rate and compare yours against theirs. Not all companies make their attrition rate publicly available, but you may be able to make an estimate by looking at employment review sites like Glassdoor, where former employees can state how long they worked for a business. 

What Are the Hidden Expenses of Employee Turnover?

The cost of employee turnover goes a lot farther than the cost of replacing an employee. Some examples:

  • Rapid turnover undermines client relationships when the departing employee is one that clients are used to working with.
  • Employees who stick around longer learn more and become more efficient, which increases productivity.
  • When employees separate, you lose everything you invested in training and development.
  • A high employee turnover rate can give your brand a bad reputation as an unpleasant workplace, making the turnover problem even worse.
  • As word spreads, a high turnover rate degrades trust among customers, too.
  • Because high turnover gives organizations a bad reputation, you’ll have fewer applicants — which leads to less of what you need in the talent pool and longer, more expensive hiring procedures.
  • High attrition and turnover often mean your organization is short-staffed while you search for new employees — and over-working your existing staff degrades morale and risks even higher turnover.

These are just some of the hidden costs — and many of these things interact with each other to compound the situation. For example, high turnover can leave your team overworked and demoralized, which reduces productivity. It can also mean that you spent time and money searching for new employees — resources that you could have spent developing your existing employees.

9 Ways to Reduce Turnover

If you have high turnover, you’ll need to do something to improve employee retention. Here are some steps you can take to reduce turnover.

1. Analyze Salaries, Benefits Packages, and Work Culture — Make Sure All Are Competitive

There’s always a reason behind high turnover — and it could be that employees aren’t satisfied with the work culture, their salaries, or the benefits they’re receiving. Thoroughly analyze every part of your employee offerings to see if there are ways to boost satisfaction and employee engagement.

With this, consider your turnover cost. Some employers are reluctant to raise wages or offer better benefits — but the truth is, salary and benefit increases can be a lot less costly than turnover.

2. Elicit Feedback — Perform Exit Interviews to Figure Out What Is Wrong

Conduct exit interviews, ask for feedback, and send out anonymous employee surveys — and then use the information you receive to learn what is wrong and how you can improve things.

If you ask for feedback, it’s crucial to act on the intel you’ve gathered, especially when many team members say similar things. If you ask but fail to follow through, you can do more damage to morale than if you’d not asked in the first place.

3. Make Sure Responsibility Distribution Doesn’t Overwhelm Team Members

Overwhelmed employees are unhappy ones. When searching for new employees, it's the perfect time to ask team members about responsibility distribution. See what you can do to lighten the load, or you could face more resignations in the future.

4. Continuously Monitor Your Open Positions

Team dynamics change with time — and they can change a lot when even one employee departs. Because those changes can sometimes be for the worse, it’s important to keep an eye on how open positions affect your team as a whole.

5. Stop Chronic Complaining

It’s natural for some complaining to happen when team members need to pick up slack. When complaining becomes chronic, however, it can bring down the whole team’s energy.

When you have a team member who complains enough to affect morale, it’s time to pull that person aside and have a heart-to-heart chat about the problem to address it swiftly.

6. Don’t Fill the Slot With a Bad Hire

Productivity drops are almost guaranteed when employees leave — but you should resist the temptation to hire anyone just to fill the role. A bad hire who doesn’t fit the position can be more costly and damaging than leaving the position vacant.

7. Stop the Brain Drain

By cross-training and setting up knowledge-sharing protocols, you can prevent the loss of essential information when an employee quits. Set up times for junior team members to shadow senior employees to access their knowledge. As an added benefit, this can foster relationships and provide opportunities to identify outdated processes.

8. Build a Robust Employer Brand

One of the best ways to stem the tide of high turnover is to build a strong employer brand.

When you cultivate a positive image and workplace culture, your company will be a better place to work — and quitting will be the furthest thing from team members’ minds.

9. Maintain High Employee Morale

High morale equals low turnover. Keep team members happy to make them want to stay by incorporating some of the following methods:

  • Create an employee recognition program.
  • Offer incentives for top performers.
  • Implement a health and wellness program and prioritize mental health.
  • Provide ongoing career development training opportunities.
  • Communicate often and be transparent. 
  • Incorporate team-building activities that remote or on-site team members can participate in.

The Best Way To Save on Turnover Costs

Ready to start cutting down high turnover costs? Hunt Club can help you build a talent pipeline. You’ll get candidates carefully curated by a team of experts — and when you have access to a talent pool pre-screened by specialists who know what makes a stellar employee, your retention rates increase. Get in touch with Hunt Club today, and we’ll help you cut down on high turnover costs.

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Morgan Lichtenstein avatarMorgan Lichtenstein