$37,661.77.
Does that sound like a lot of money to you? You might be surprised to learn that this is the approximate cost of losing just a single mid-level employee!
When all factors are taken into consideration, losing employees is very expensive. It can end up damaging your company in intangible ways, too. Employees leave companies for a variety of reasons and dealing with turnover can be frustrating. However, the good news is, there are a number of things you can do to lower turnover at your company.
Below, I’ll break down how to calculate the cost of turnover, why it’s important, and what you can do to reduce its impact.
Why is Talent Retention Important?
Besides the immediate financial cost of turnover, retaining staff is important for many other reasons. For one thing, high turnover can lower your company’s productivity. That’s because new employees aren’t totally productive right away. Estimates of how long it takes for them to reach full productivity range from eight months to two years.
Turnover is also detrimental to employee engagement. When employees see their fellow team members leaving for supposedly greener pastures, this lowers morale and spreads unhappiness and disenchantment. Interestingly, turnover and engagement have a cyclical relationship; each one influences the other. Highly-engaged business units may have up to 59% lower turnover, according to Gallup—so while high turnover can lower employee engagement, high engagement can also lower turnover.
Calculating the Cost of Losing Talent
So, where did the $37,661.77 figure come from? That number is based on an employee who works 235 days per year, with an annual salary of $65,000 plus a benefits cost of $19,500.
There are a lot of factors to consider when calculating turnover costs. Here’s a breakdown of the formula we use at Involved Talent:
Vacancy Costs
The first thing to consider is the cost of the vacancy. Whether you’ve hired a temporary employee or are having current employees take time away from their usual tasks to attend to the vacancy, filling an empty spot takes time and money.
In our formula example, we’ve assumed that the position is open for 90 days. Of course, the exact amount of time it takes you to fill the position (sometimes called “time-to-fill”) will vary based on the industry you’re in, and the type of position you’re hiring for. Specialized jobs and senior positions may take more time. We’ve set the daily cost of covering for the position at 37% of the daily cost for the departing employee, which means the total cost of covering the position is $11,973.83.
Separation and Hiring Costs
The next thing to think about is the cost of your hiring process. There are many costs involved in a typical hiring process, from the hiring manager’s salary to fees for posting ads on job boards.
Although hiring can be expensive, this is an area that’s really worth investing in when it comes to talent retention. Retention actually starts at the time of hiring. By only onboarding employees that are a great fit for your company, you’ll lower the risk of losing them later on. This may end up saving you money and making your business more productive in the long run. If you’re looking to improve your hiring process but aren’t quite sure where to begin, consider looking for a consultant to help you develop more efficient techniques for candidate sourcing and screening.
In our formula, we consider these factors when calculating the cost of hiring:
- HR manager’s salary: we’ve set this at $85,000 a year
- We then have to consider the hours the HR manager spends on the exit interview for the departing employee, resume screening, and interviewing new candidates… about 35 hours in total.
- Advertising costs, set at $1500
- Separation costs for the departing employee, set at $500
- Administrative costs for the new employee, set at $500
The total hiring cost comes out to $3687.94—and this is very conservative. Actual hiring costs may be even higher.
New Hire Training Cost
Next, we also have to think about the costs of training the new employee.
The bulk of this cost comes from the salary of the manager who is responsible for training. While the manager is busy training the new employee, their time will be taken away from their other tasks. There may also be some additional onboarding costs, such as the cost of supplies for the new employee.
In our example, we’ve given the senior manager an annual salary of $125,000. With 10 cumulative days spent on training and a mere $500 allotted for other costs, the total cost of training the new hire comes out to $5819.15. Again, this is a conservative estimate.
Loss of Productivity
Finally, the last thing to think about is the cost of lost productivity.
A new employee won’t be as productive or efficient as an employee that already “knows the ropes”. As previously mentioned, it can take months or even years for a new employee to actually reach full productivity. But for the purpose of our formula, we’ve used a conservative estimate of 90 days.
Assuming that the individual’s salary is the same as the departing employee’s, but that they’ll only be working at 50% productivity for the first 90 days of their job, the cost of productivity loss is $16,180.85.
When you add all the costs together, you get that magic number: $37,661.77. Keep in mind, this is only the tangible cost of losing an employee. There are also many intangible costs—like lower morale among your teams and lost institutional memory—which are harder to measure, but nonetheless very harmful to your business.
How Talent Retention is Evolving Right Now: Remote Work and Back to the Office
In the past year, the COVID-19 crisis has given business owners even more of a reason to focus on employee retention. The challenges of transitioning to remote work, and then possibly back to the office, have put a strain on employees and managers alike.
Employees respond to working from home in different ways. The data on remote work is complicated—remote workers tend to report higher levels of engagement, but also increased worry and stress, according to Gallup. Individuals may enjoy remote work or struggle with it, depending on their own personality. And returning to the office presents its own change management challenges.
In a volatile environment, it’s more important than ever for companies to keep a close eye on employee engagement. To prevent turnover in unstable times, you need to make sure communication channels are open, and managers are properly trained for remote performance management.
Solutions for Improving Retention at Your Company
Of course, some amount of employee attrition is expected in any business. Retirement, family situations, and personal reasons may all cause your employees to quit through no fault of your own. But if there are structural challenges at your company, identifying and addressing these can help you improve employee retention.
Consider this: how much visibility do you have over what’s going on in your company? Do you understand the way employees and managers are communicating? Are there issues with company culture that have been overlooked?
The best way to find this out is to ask your employees. With regular internal surveys, you can collect the data you need to understand total talent involvement. You can also analyze that data, using it to make predictions and create strategic plans for the future.
Once you’ve identified problems, use the insights you’ve gained to create culture initiatives and make necessary changes. Don’t forget to measure your progress along the way—make sure you have a handle on what your annual employee turnover rate is right now, and what you’d like it to be. When it comes to talent retention, take a data-driven approach to get the best results.
Conclusion
It’s clear that if talent retention isn’t already a top priority for your company, it should be. The cost of turnover is just too high to be ignored. Not only does turnover harm your bottom line in the short term, it’s also a long-term blocker for productivity, employee involvement, and business success.
At times when instability and changes threaten employee involvement, it’s especially important to think about retention. Now is the time to invest in your people, lower employee turnover, and get better results.