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How to Calculate the Real Turnover Cost of Your Employees

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October 28, 2020Hiring

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Excessive employee turnover can be outrageously expensive for your company.

It can cause all sorts of problems, such as destroying your employer brand and causing your sterling reputation to take a nosedive. However, many companies fail to treat this problem with the seriousness it deserves.

In this article, we’ll talk about how you should calculate turnover costs, and the hidden expenses of this insidious problem. We'll also discuss ways to reduce employee turnover before it kills your bottom line. 

Defining turnover cost

Turnover cost is the money it’s going to take to hire and train an employee who replaces someone who left the company. This isn't merely the cost of hiring, but also the expense of getting them up to speed.

This means that they’re at least as productive as the employee they’re replacing.

How much does it cost to turnover a typical role?

Average replacement costs for employees tend to be 16% of annual salary for high-turnover jobs (CAP study). Breaking it down further, that's 20% of annual salary for midrange positions and 21% of annual salary for executive-level positions.

Turnover related costs represent more than 12% of pre-tax income at companies with an average turnover rate. 

When Turnover Is a Good Thing

Sometimes, turnover can be the best thing that ever happened to your company and the departing employee. For example, if you get rid of a team member right before they start to stagnate.

You need to differentiate between turnover that's healthy and turnover that has a demoralizing effect and damages your bottom line.

How do you calculate turnover costs?

The following is a simple way to compute employee turnover:

Expenses Before Leaving

An employee’s productivity usually takes a nosedive once he makes the decision to leave a company. So, you’ll need to figure out the monetary cost of that decline in performance.

In the first spreadsheet, write in “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 says “goodbye.” The second column is the hours of lost productivity.

For the departing employee, this is usually 50 to 75% of what an employee works in a week. For coworkers and supervisors, it’s the hours they’ll have to put in to pick up the slack.

The third column is for weekly salaries.

Multiply weeks before departure times the number of hours per week times hourly salary for each line. 

Then, add up the total.

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 work to do the job.

The third column is hourly pay for that employee. Multiply the columns together, and then add them up.

Training Expenses

In the first column, list the number of weeks it’ll take to train your new recruit.

In the second column, write down training hours per week.

In the third column, write in hourly pay for each employee.

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

Administrative and Hiring Tasks

On a spreadsheet, list all the tasks your business will have to do to hire a new employee in different rows. These are things like separation processing, advertising, and resume screening.

You’ll have two columns: “HOURS PER EMPLOYEE” and “HOURLY PAY.”

Write down the time spent on each hiring task and then the hourly pay for the employee doing the tasks. Multiply hours per week by hourly wage for each line.

Then, add up the total. 

Other Hiring Expenses

If you have hiring expenses not listed here, include them on other spreadsheets.

Total Cost of Turnover (Per Employee)

Now, just list the total amounts from above and add them up.

What are the hidden expenses of employee turnover?

The cost of employee turnover goes a lot further than merely the costs of replacing an employee. There are hidden expenses that can continue to do devastating damage to your company’s carefully cultivated reputation long after the employee is replaced.

For example, too-frequent turnover can quickly undermine relationships with clients. Suppose customers feel that your company's service is no longer what they’re accustomed to after a team member they’re used to doing business with skedaddles. If so, you could lose their business forever.

The longer a team member stays with a company, the more productive he gets, and the more valuable he is to the company. 

When you lose an employee, you’re losing an appreciating asset, and all the money you invested in his training goes out the window. It can take up to two years for a new recruit to reach the productivity levels of the employee he replaced.

High turnover can have a calamitous effect on your employer brand. This would be a tragedy of Shakespearean proportions if you spent years carefully cultivating it. 

With continuous turnover, it becomes difficult for team members to maintain high trust and confidence in your company. That's because employees will wonder why you can’t retain team members, and they might start to think that they should be the next to leave.

When your employee roster drastically changes from one month to the next, it becomes incredibly challenging to build the kind of team that'll take your company to the next level. 

It can also significantly reduce the number of applicants for your open positions.

This increases the time you spend filling vacancies, taking your attention away from other tasks.

Whenever an employee prematurely walks out the door, you're losing valuable knowledge and carefully cultivated relationships that your company can't afford to lose.

The desperate need to hire an employee to replace one who quit can negatively impact the entire team as it focuses all its energy on the task. When employees have too much on their plates, their effectiveness will suffer.

When a team suffers the harmful effects of frequent turnover, employee development will take a backseat to finding replacements. This can be a vicious downward spiral, and the lack of employee development can lead to significant turnover.

All these things will negatively impact your bottom line and could make your business appear hopelessly broken to outsiders.

Ways to reduce turnover

There are steps you can take to stem the tide of high turnover rates. When you do this, you’ll save money by not having to fill positions so much.

Here’s what you can do: 

Problem-solving

Scrutinize every part of your business to determine why turnover is such a problem. It could be that your pay isn't competitive enough.  Or, maybe employees don't feel supported.  And because they don't feel supported, there's a pervasive lack of engagement.

Elicit feedback

One surefire way to stop high turnover is to actively elicit feedback from your employees. You can do this with exit interviews or surveys that show you what your current team members think of your organization. Whatever you uncover, you must be committed to using the intelligence you've gathered to make changes. That's because asking for information and then failing to act on it can be incredibly demoralizing.

Responsibility Distribution

While you're waiting for the right candidate, get your team's input on the redistribution of responsibilities. That way, you can help prevent them from feeling overwhelmed by having to pick up the slack. If they feel overwhelmed, they could be the next in line to hand in their resignation.

Continuously monitor your open positions

Even a single employee departing for greener pastures will change the team dynamics—possibly for the worse. That's why you need to continuously monitor how an open position affects the team as a whole.

Stop chronic complaining

Some complaining about having to pick up the slack should be tolerated. However, when it becomes chronic, it can bring down the energy level of the entire team. So, if you come across an employee who is bellyaching so much it’s affecting morale, you need to nip it in the bud by having a heart-to-heart talk.

Don’t fill the slot with a bad hire

When an employee departs, a precipitous drop in productivity is practically guaranteed. However, resist the overwhelming temptation to immediately put someone in the slot just for the sake of filling the position. That’s because a bad hire can be infinitely worse than no hire.

Stop the brain drain

By cross-training and setting up knowledge-sharing protocols, you can prevent the tragic loss of information essential to the company's running when an employee quits. Set up times for junior team members to shadow senior ones so they can learn this knowledge.

Build a robust employer brand

One of the best ways to stem the tide of high turnover rates is by building a strong employer brand. When you cultivate a positive workplace culture, and your company is a fantastic place to work, quitting will be the furthest thing from team members' minds.

Maintain high employee morale

Keeping your employees happy will make them want to stay; high morale, low turnover.

The Best Way to Save on Turnover Costs

The best way to stem the tide of employee turnover before it starts to eat up all your precious financial resources?

Build a talent pipeline by using network recruiters!

That way, you’ll get candidates who are carefully curated by a team of experts. When an applicant is pre-screened by specialists who know what makes for a stellar employee, that person is more likely to stick around.

Call Hunt Club today, and we’ll help you cut down on high turnover costs!

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