The Cost of Employee TurnoverAugust 20, 2015 . .
… And the Value of Employee Retention & Loyalty
According to most studies, the cost of employee turnover typically costs 100% of annual salary—and much higher for top performers, strategic positions, and when a position remains vacant for an extended period.
Why is turnover so expensive?
Different organizations, positions, and labour markets determine which of the following costs apply in any particular case, and to what extent. Nevertheless, the following list outlines where most of the costs come from and why turnover is so expensive.
- Poor performance: Low or decreased productivity before someone quits or is fired.
- Drain on other employees: During this period, other employees must cover for the employee whose productivity has dropped: picking up the slack, correcting errors…
- Team performance: Poor performance by one person affects team morale which has a negative effect on team productivity.
- Vacant position: When an employee leaves, other employees have to cover for them until a new person is hired, pulling them away from their duties. Further, some important work is often left undone.
- Loss of intellectual capital: There are costs of losing the experience, knowledge, and relationships that employees takes with them when they go.
- Recruiting & hiring: It takes time and money to recruit, screen, interview, and hire new employees.
- New employee orientation: It costs money to set up new employees on payroll, orient them, introduce them to key contacts, assign tools, equipment, supplies, and the like.
- On-the-job training: New employees have to trained, coached, and mentored. And before they are fully productive, many people are usually chipping in, helping out, covering, correcting errors, and so on.
- Ramp-up & opportunity cost: There is also the cost of low productivity and missed opportunities while a new employee learns his or her job. Depending on the complexity of the job, this can take weeks or months. And depending on the strategic importance of the job, the opportunity costs can be substantial.
- Loss of reputation/brand: Loss of a key player can be embarrassing to the organization, negatively impacting reputation and brand, which can affect competitive positioning in the marketplace.
The longer an employee performs poorly before he/she is moved or let go, the higher the costs of that non-performance.
The more talented the employee was, the more difficult the employee will be to replace, and the longer it will take the new hire to achieve the same high level of productivity.
The cost of turnover is even greater in a tight labour market. This issue may become critical with the upcoming massive retirement of the baby boomers. At that time, it will be very difficult to recruit, and good companies may even lose some loyal talent to firms that are woefully unprepared and desperate. This makes it all the more important for organizations to develop talent internally and continually improve their retention efforts and practices.
Mornell’s Rule of Thumb:
Pierre Mornell argues that if you make a mistake in hiring, and you recognize and rectify the mistake within six months, the cost of replacing that employee is two and one-half times the person’s annual salary. Put another way, the wrong person earning $50,000 will cost your company $125,000. The wrong executive making $100,000 will cost you a quarter of a million dollars if you rectify the mistake within six months. And this economic estimate doesn’t even consider the emotional costs. Who among us hasn’t driven home or lain awake at night having imaginary conversations with a troubled employee or difficult colleague?
Mornell asked 100 clients these three questions:
- What was your worst hire?
- How long did the situation take to resolve?
- How much did the mistake cost?
You can ask yourself these questions too. The responses to his survey suggested that the actual costs of turnover were much higher: Time to resolve the situation: median: 1 year; average: 1.5 years. How much the mistake cost: median: $300,000; average: $1,087,863.
Something else to consider: research reported in the Service Profit Chain shows a correlation between employee satisfaction and customer satisfaction, and between employee tenure and customer loyalty. This makes perfect sense, of course: grumpy employees make for poor service and dissatisfied customers; and longer term employees can build stronger relationships with customers, and develop much greater understanding of the nuances of your customers’ changing needs.
Leaky Bucket Analogy:
I heard an analogy many years ago that really stuck with me. Employee turnover is like a bucket with a leak in it, with talent pouring out the bottom. Many companies make the mistake of pouring millions of dollars into recruiting so they can keep the bucket full. They try to fill the bucket faster than it is losing talent out the hole in the bottom. But what a waste that is—especially given the high cost of recruiting and turnover.
A much better strategy is to repair the hole in the bucket. It is far wiser to invest in employee engagement and retention than continue pouring talent into a leaky bucket. In addition, engaged employees are more productive and easier to develop.
How much is your talent worth?
Copyright © 2015 Joel Shapiro, Ph.D., all rights reserved.
Joel is passionate about making employees part of the solution. As a member of the team at Incrementa Consulting, his focus is on building leadership capacity, improving collaborative practice, and aligning culture with strategy to create a competitive advantage for his clients. You can read more of Joel’s thoughts on the Incrementa website, at his former blog, and on twitter.