Solutions to Lowering Employee Turnover Costs

The investment of hiring and training committed and talented employees is most logoimportant for any company’s long-term growth. Employment cost has skyrocketed in recent years. Most of this cost involves administrative and management time. Do you know how much it costs to hire employees in various jobs in your organization?

Use this cost of hiring an employee calculator:

Costs of employee turnover can include recruiting, screening, training, unemployment benefits, workers compensation with intangible costs including employee and customer satisfaction that affect productivity. Keep in mind that the estimated total cost per hire is conservative because it does not include advertising and recruitment costs (e.g., newspaper ads, website advertising, job fairs, college campus recruiting), administrative costs for processing individuals who are hired, and costs related to moving expenses.

The loss of a good employee creates a void that ripples throughout the company that always affects profit. Use this Human Resource Investment Calculator to find out how much money is going down the drain if you hire and train people who don’t have what it takes to be successful in your company. The best investment of a new hire can be maximized with solutions that include: temp-to-hire, mentoring and a probationary period.

Difficult costs to measure of losing a valuable employee include time and resources lost with investing in an employee that is not a good fit for the job. This is minimized by a Temp-to-Hire solution. Using an agency to carry the tax and unemployment cost burden allows more freedom to decide if the new hire is a good fit. Supervisors have an opportunity to assess the employee’s talent and knowledge before converting to a permanent basis. This solution helps to lower the financial cost and minimizes the risk with the company.

Investments in employees do not stop with wages and benefits. Administrative and management costs related to training and development also need to be considered. Investing in employees, even for “low-paying” jobs, typically involves a significant amount of money.

For example, a CAP study found average costs to replace an employee are: 16% of annual salary for high-turnover, low-paying jobs (earning under $30,000 a year). For example, the cost to replace a $10/hour retail employee would be $3,328 and 20% of annual salary for mid-range positions (earning $30,000 to $50,000 a year), as of February 4th, 2016.

Another solution to assist with lowering employee turnover and costs is to set up a mentoring program to keep new hires engaged. Assigning a seasoned staffer with a new hire keeps communications open with management to determine training needs. The office culture exhibits a professional, supportive environment where everyone can grow and contribute to the success of the business. Having an assigned mentor keeps a pulse on making corrections sooner rather than later.

According to the Bureau of Labor Statistics, turnover is highest in industries such as trade and utilities, construction, retail, customer service, hospitality, and service.

Some studies (such as SHMR) predict that every time a business replaces a salaried employee, it costs 6 to 9 months’ salary on average. For a manager making $40,000 a year, that’s $20,000 to $30,000 in recruiting and training expenses. But others predict the cost is even more – that losing a salaried employee can cost as much as 2x their annual salary, especially for a high-earner or executive level employee.

Turnover seems to vary by wage and role of employee. For example, a CAP study found average costs to replace an employee are:

  • 16% of annual salary for high-turnover, low-paying jobs (earning under $30,000 a year). For example, the cost to replace a $10/hour retail employee would be $3,328.
  • 20% of annual salary for mid-range positions (earning $30,000 to $50,000 a year). For example, the cost to replace a $40k manager would be $8,000.
  • Up to 213% of annual salary for highly educated executive positions. For example, the cost to replace a $100k CEO is $213,000.

What makes it so hard to predict the true cost of employee turnover is there are many intangible, and often untracked, costs associated with employee turnover.

These factors include:

  • The cost of hiring a new employee, including the advertising, interviewing, screening, and hiring.
  • Cost of on-boarding a new person, including training and management time.
  • Lost productivity-it may take a new employee 1-2 years to reach the productivity of an existing person.
  • Lost engagement- other employees who see high turnover disengage and lost productivity.
  • Customer service and errors, for example new employees take longer and are often less adept at solving problems.
  • Training cost. For example, over 2-3 years a business likely invests 10-20% of an employee’s salary or more in training
  • Cultural impact- whenever someone leaves others take time to ask “why?”

One of the reasons the real cost of employee turnover is an unknown is most companies don’t have systems in place to track exit costs, recruiting, interviewing, hiring, orientation and training, lost productivity, potential customer dissatisfaction, reduced or lost business, administrative costs, lost expertise, etc. This takes collaboration among departments (HR, Finance, Operations, etc.) to find ways to measure these costs, and reporting mechanisms.

Establishing a probationary period for a permanent placement staffer gives the opportunity for all participants to experience a good fit within the company. Normally a three-month time period is sufficient to determine and assess the value impact of investing further in a long-term placement. Sometimes the decision is difficult but better to be up front than to wait too long to let an unhappy union continue. Setting this precedence with a new hire allows for both parties to make a good informed decision.

The cost of employee turnover varies with type of position, industry, salary range, and skill set. It is clearly evident that the loss of a valued team player impacts the bottom line with the void that is left to fill by other employees with the recruitment and training time and cost for the replacement. Minimizing or hopefully avoiding these costs with some simple solutions can positively affect the long-term success of a company.