Employee Turnover Is Costing You More Than You Realize

Employee turnover will happen; in fact, you, as an employer, should welcome it when it allows you to cut loose underperforming employees and retain the loyal and productive team members. What you may not realize is how much employee turnover costs, whether you dismiss employees you’re glad are gone or you must replace your best employees that leave because of relocation, health reasons or new opportunities that you can’t offer. As a smart business owner, you don’t want to make the same mistake that too many business owners make: They know to the penny their labor (wages and benefits package) and operational (rent, utilities, etc.) costs, but not their employee-turnover costs.

The Society for Human Resource Management (SHRM) determined that a single $8.00-per-hour employee could cost $3,500 to replace, which includes recruiting, interviewing, hiring, training, loss of productivity, etc. The research of other labor industry and business groups revealed the following employee-turnover costs: 30–50% of entry-level employees’ annual salaries, 150% of middle-level employees and as much as 400% for executives and employees with specialized skills.

Employee-turnover costs can also be understood when the research is applied to real-world examples. Let’s say your small business has two managers/supervisors and they drive most of the productivity of your company on a day-to-day, hour-to-hour basis; therefore, losing one of them could have a significant impact on your productivity and bottom line. Let’s also assume that their average annual salary is $40,000. According to the research, middle-level employees cost 150% of their annual salaries in turnover costs. Let’s use 125% to be conservative, which calculates to a cost of $50,000 to replace one of your managers.

Employee-turnover calculations for entry-level, or the lowest-paid, employees reveal a similar eye-opening result. For every five of these employees you lose per year, it could cost you as little as $17,500 (5 employees X $3,500, based on SHRM study) or as much as $40,000 (5 employees X $8,000, or 50% of an annual $8.00-an-hour salary, based on the other studies).

The smart strategy is to separate your employee-turnover costs and analysis into two categories: the less-productive employees, most of whom you would want to replace, and the highly productive employees that you want to keep. Once you study the research and examples above, and then calculate employee-turnover costs for your business, you’ll discover that the cost of expanding your benefits package or providing more incentives, bonuses and other employee perks cost much less than the cost of replacing your best employees. Give them more reasons to stay and you’re likely to retain more of the employees you want, and even motivate some of those that were underperforming to become valuable employees and not turnover statistics.

Filed under: Recruiting, Hiring and Retention

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