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Talent & CultureTrends & InsightsThe True Cost of Losing an Employee

The True Cost of Losing an Employee

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Losing a valued employee can have a tremendous impact on a business. 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 turnover. With a deeper understanding of these expenses, business leaders can better prioritize retention strategies and make smart investments in their people.

What is the Cost of Losing an Employee?

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The cost of losing an employee can vary based on industry, position, and salary

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 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 turnover costs varies significantly by position:

  • Hourly Positions – Average of $1,500 per turnover
  • Salaried Positions – Can range from 100-200% of annual salary
  • Highly Skilled Positions – Up to 400% 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, turnover costs could reach $200,000.

Industry Variances in Direct Costs of hiring an employee

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Estimating the total cost of turnover involves considering both direct and indirect expenses

Turnover costs also fluctuate dramatically between industries. According to LinkedIn’s 2022 Global Talent Trends report, the highest turnover rates were found in:

  • Retail (Average Turnover Rate: 59%)
  • Healthcare (Average Turnover Rate: 19%)
  • Tech (Average Turnover Rate: 13%)

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.

Calculating Costs to recruit an employee

To calculate your specific direct turnover costs, track the following categories per open position:

  • Advertising and job board fees
  • Agency recruiter fees
  • Applicant travel reimbursements
  • Staff time screening applicants and interviews
  • Assessments and skills testing
  • Background check services
  • Signing bonuses or special incentives
  • Relocation assistance
  • New employee orientation and onboarding
  • Training and management ramp-up time
  • Temporary workers to cover the workload

Multiplying these costs by your company’s turnover rate will give you a data-driven look at the tangible impact on your bottom line.

The Indirect Costs of 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.

Putting a Price Tag on Indirect Costs

Since indirect costs are difficult to quantify, many organizations exclude them from their total cost of turnover calculations. However, multiple studies have shown the indirect costs often exceed the direct expenses:

  • The Society for Human Resource Management estimates that indirect turnover costs can range from 50-200% of an employee’s annual salary.
  • Professor Michael Watkins of IMD Business School argues that indirect turnover costs are frequently as high as two times the employee’s salary.

To account for indirect expenses, most experts recommend adding at least 50% – 100% of the employee’s compensation when calculating your total cost of turnover.

For example:

Direct turnover costs to replace a $60,000 manager = $30,000

Indirect costs estimated at 100% of salary = $60,000

Total Cost of Turnover = $90,000

Strategies to Calculate Your Turnover Costs

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

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Selective hiring practices can help ensure a good cultural fit and reduce turnover in the long run.

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.

Reducing The High Cost of 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
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