The True Cost of Losing an Employee

Losing a valued employee can have a tremendous impact on a business, which must be avoided at all costs when it comes to applying talent trends. While some costs, like severance and recruitment fees, are easily quantifiable, others are less obvious. When an employee leaves, it creates a ripple effect that can significantly hurt a company’s bottom line.

In this article, we will analyze the various direct and indirect costs associated with employee turnover. We’ll look at how different roles and industries are impacted and provide tips for calculating your organization’s total cost of employee turnover.

With a deeper understanding of these expenses, business leaders can better prioritize employee retention strategies and make smart investments in their people.

What is the Cost of Losing an Employee?

It’s important to understand what the cost of losing an employee means. This refers to the total financial impact created when an employee voluntarily or involuntarily departs a role. It encompasses all tangible, direct, hidden, and indirect costs.

Some key factors that contribute to the cost of losing an employee include:

• Recruitment and hiring expenses to find a replacement
• Lost productivity as the role remains vacant
• Lost knowledge and expertise when the employee leaves
• Reduced engagement and morale among remaining staff
• Mistakes and ramp-up time for the new hire
• Customer dissatisfaction if service declines

Simply put, the cost of losing an employee is the total burden placed on a business when employee turnover occurs. And as we’ll explore, this burden can become quite substantial.

The Direct Costs of Employee Turnover

Direct costs include all the tangible, out-of-pocket expenses for replacing a departed worker. This includes:

• Recruitment Costs: Advertising open positions, screening applicants, interviews, assessments, background checks, employment agency fees, recruiter fees, hiring bonuses, referral bonuses, and relocation costs.
• Onboarding Costs: New hire orientation, training, manager ramp-up time, materials/supplies, drug testing, travel, and temporary workers to cover the workload.
• Separation Costs: Severance pay, accrued vacation payouts, unemployment taxes, healthcare coverage, and exit interviewing.

The magnitude of direct employee turnover costs varies significantly by position:

• Hourly Positions – Average of $1,500 per turnover
• Salaried Positions – Can range from 100-150% of annual salary
• Executive Positions – Up to 213% of annual salary

For example, the cost to replace a $40,000 per year hourly employee is $1,500. For a $100,000 per year senior manager, employee turnover costs could reach $200,000.

Source: https://builtin.com/recruiting/cost-of-turnover

The Indirect Costs of Employee Turnover

In addition to direct expenses, turnover leads to a variety of indirect costs that are more difficult to quantify but can significantly harm productivity and profitability:

Lost Productivity

• Departing employees are less productive as they wrap up projects and disengage.
• A learning curve impacts new hires as they get up to speed. A new employee can take 8-12 months to reach peak productivity.
• Co-workers are disrupted by interviewing replacement candidates and providing training.
• Managers must take time away from critical projects to hire and onboard new staff.

Lost Engagement

• Turnover breeds more turnover. When employees see their co-workers leaving, they question their future with the company.
• Morale and team cohesion deteriorate. Long-term relationships are broken.
• Employees disengage as they worry about job security and whether they should also look for new opportunities.

Lost Knowledge

• When employees depart, their intimate understanding of systems, customers, and responsibilities walks out the door with them.
• Some knowledge and context transfer slowly through documentation and cross-training. Other insights may be lost forever.

Customer Impact

• New hires take longer to respond to customer needs and resolve issues.
• Mistakes are more likely as replacements learn the role. This can damage customer satisfaction, loyalty, referrals, and retention.

How Employee Turnover Varies by Industry

Employee turnover costs also fluctuate dramatically between industries. According to 2024 US Mercer Turnover Survey report, the highest turnover rates were found in:

• Retail (Average Turnover Rate: 25.9%)
• Blue collar professionals (Average Turnover Rate: 11.5%)
• White collar professionals (Average Turnover Rate: 10.5%)

Source: https://www.imercer.com/articleinsights/workforce-turnover-trends-canada

Retail’s high turnover is primarily driven by low pay and limited advancement opportunities. Frontline customer-facing roles must be filled constantly, increasing recruitment and training costs.

In healthcare, complex licensing and strict educational requirements make replacing clinical staff more expensive. For example, a hospital could spend over $100,000 recruiting a specialty physician.

The tech industry needs help to fill high-skill positions where candidates expect excellent compensation and benefits. To attract talent, tech companies invest heavily in hiring incentives and counteroffers.

How to Measure Indirect Costs of Losing an Employee

While indirect costs are hard to quantify ideally, it is worth estimating your total expenses closely. Here are three effective strategies:

Track Tangible Productivity Losses

Monitor specific productivity metrics before, during, and after turnover occurs. Examples could include:

• Customer response times
• Sales closed per rep
• Orders processed per fulfillment worker
• Lines of code written per developer

Compare this data between new hires, remaining tenured employees, and the business average. The gap can help quantify productivity loss.

Administer Exit Interviews

Asking thoughtful questions during exit interviews can provide valuable insights into indirect costs:

• How much runway do you estimate your projects had before a successor needed to take over?
• How long will it take for a new person to get fully up to speed in this role?
• What are some examples of important knowledge and context you have that would be difficult to pass on fully?

The more data points gathered, the better you can estimate indirect impacts.

Conduct New Hire Assessments

Check in with new employees at the 30, 60 and 90-day marks:

• On a 1-10 scale, how comfortable do you feel with the job’s core responsibilities?
• What parts of the role are you still learning or need more training on?
• If applicable, how would you describe your current productivity level compared to experienced employees? Is it 25%, 50%, 75%?

Their feedback will shed light on the length of ramp-up time and help quantify lost productivity.

Effective Strategies to Reduce Employee Turnover

Now that we’ve explored both direct and indirect turnover costs, it’s apparent employee retention is a significant opportunity to impact the bottom line. Here are some of the most effective ways to reduce turnover:

Boost Engagement

Create an exceptional employee experience that makes staff feel valued, inspired, and connected to the mission:

• Foster positive relationships between managers and direct reports
• Promote transparent communication and feedback practices
• Celebrate wins and milestones
• Invest in professional development and career pathing
• Offer praise, recognition, and rewards for great work
• Encourage work/life balance and flexibility
• Promote diversity, equity and inclusion

Focus on Selective Hiring

Be highly selective during the hiring process to ensure a great cultural fit:

• Define your ideal employee profile and characteristics
• Incorporate behavioral interviewing
• Utilize pre-employment testing and assessments
• Conduct thorough reference checks
• Set realistic job previews to confirm the fit

Learn more about talent trends in Canada at Ebsource
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Remote Work Policies in Canada
Employee Retention Strategies
Canadian Workplace Culture

Key Takeaways

In general, losing an employee can have significant tangible and intangible costs that underscore the importance of investing in employee retention strategies. Below are the key takeaways regarding the employee retention that a company owner should be aware of:

• Losing an employee can cost a company significantly, especially for key roles that are hard to replace.
• Costs include recruiting fees, temporary staffing, lost productivity, and ramp up time to fill the vacancy. For specialized roles, this can easily exceed $80,000+ per employee.
• Intangible costs like lost expertise, disrupted operations, and delayed initiatives can also impact the business when losing a valuable team member.
• Turnover is especially expensive for top performers with organizational knowledge and client relationships that take time to rebuild.
• Investing in competitive compensation, training, engagement initiatives, and employee retention strategies helps reduce turnover and avoid replacement costs.
• Tracking metrics like turnover rate, cost per hire, and vacant role impacts allows companies to quantify the business cost of losing employees.
• Proactive and thoughtful employee retention is critical for protecting productivity, intellectual capital, and the bottom line when talent chooses to leave.

Frequently Asked Questions about Cost of Losing an Employee