7 Reasons Why Employee Turnover Is So Expensive

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See the importance of employee retention and the effect it can have on your operating budget with 7 reasons why employee turnover is so expensive.

Losing a job is rarely fun for an employee. Losing an employee is often no picnic for the business, either. 

Sure, some employees make themselves entirely dispensable and you’re nothing but glad to hand them their termination letter and see the back of them. But when a valued employee leaves then that’s when there will be a whole bunch of exit costs to the organization.

There are many significant employee turnover costs that will accrue, and even more so if you do not know 7 reasons why employee turnover is so expensive.

What is Employee Turnover?

Employee turnover rate is among the most important HR KPIs. But what does it actually mean?

When a business loses an employee for whatever reason, this contributes to the employee turnover rate. It divides into voluntary turnover rate, in which the employee is leaving or resigning of their own accord, and involuntary turnover, in which the employee has to leave.

Whatever the reasons behind employee turnover, you should try to avoid a high rate, as it’s indicative of an unhealthy organization and will lead to high costs. 

How high? Anything between 50 and 200% of the employee’s annual salary. For hourly workers,  the cost of losing them can be in the region of $1500 per employee.

Hard Costs of Employee Turnover

We’ll start with the inarguable and highly visible outgoings, that are thought to be responsible for 30% of the total employee turnover cost. 

They’re measurable, tangible costs, and tend to crop up no matter what kind of business you run. What kinds of things can these consist of?

1. Administrative Processes That Accompany Leaving

There are several steps that have to be performed when an employee is about to leave. These may include:

1. Ensuring the successor has the necessary information about any business task, from rota creation to faxing PDF online instructions.
2. Administering the departing employee with leaving checklist
3. Securing keys, fob, uniform, and all company-issued equipment. from the leaver
4. Arranging and performing an exit interview with the leaver

2. Hiring Costs

Free to use image sourced from Pixabay

Should the business want to replace the outgoing employee, then this incurs several hard costs in the hiring process:

1. Updating the job description
2. Advertising the job vacancy
3. Going through the resume selection and job interview process, which can be very lengthy and involve several senior players
4. Onboarding and training costs, concerning the business in general and their new role in particular
5. Any uniform or other considerations that go with the position

Additionally, creating a thoughtful new employee welcome email and a strong onboarding process is essential to help new hires integrate smoothly into the company culture and get up to speed with their responsibilities.

Furthermore, the cost of employee turnover is considerable and entails substantial expenses related to recruitment, onboarding, and training.

Soft Costs

These are the indirect employee turnover costs that might be overlooked, but still have a significant impact:

3. Lost Productivity

This can involve three factors:

1. The outgoing employee tends to downshift as their leaving date nears. It’s a natural but regrettable fact that leavers’ minds will inevitably wander away from their current roles.
2. Other staff can sideline a member of staff who is soon to leave. This can have a negative impact, making it difficult for the employee to carry out their duties.
3. The incoming new starter will take a while to find their feet and raise their productivity. Until then, there will be a noticeable and quite forgivable lull in output as they adapt to a new workplace.

4. Reduction in Quality

It might be the case that the function that the departing employee fulfilled was quite a skilled one. Perhaps they knew all there was to know about recruitment technologies and without them, there’s going to be a major skills gap. Or it could be that the employee was a customer service wizard.

In either case, there will be an impact on the quality of output when talented people leave until new hires have time to develop the same level of skill. In the latter situation especially, this can cost a business in terms of poorer customer relationships, meaning more complaints and fewer sales going forward.

5. Lost Institutional Knowledge

Some members of staff have been in a role so long that they’re repositories of information about all manner of company-related activities, and are an invaluable resource as a mentor for other employees. In a contact center, for instance, they can be a walking call center operations guide. When they leave, this leaves a big dent in the data bank.

Of course, answers to various queries can be sought elsewhere, but there can be problems here.

If the answer-seeker goes online, this can be time-consuming and might result in inaccuracies. If they opt to go elsewhere in the organization for their answer, this can waste a good deal of time for more than one party.

6. Morale Issues

Everybody wants team morale to be high. However, when an employee leaves it can affect how everybody else feels about their job. After all, we make human connections at work and we can end up missing other members of staff when they go. This can lead to a lack of motivation and engagement with their roles. 

Morale is especially important with remote employees, who can feel a little cut-off. It can be even worse if the person leaving was the one with all the expertise in how to hire remote employees and thereafter how to treat them so they remain in the organization.

While we’re on remote employees, it can be particularly damaging when ways of encouraging remote engagement are overlooked because the employee with specialism in this area has gone, or when issues of remote compliance are not attended to.

7. Cultural Impact

We all contribute to a positive company culture, and when somebody leaves, that can result in a big loss to that culture.

So what, you might say. How does this end up costing the business anything? Well, there are two significant consequences to consider here:

1. Deterioration in company culture can lead to a breakdown in company cohesion and staff relationships, which can lead to a drop in productivity.
2. If an organization’s culture takes a hit, you can have employees feeling less positive about their positions. Possible result? They leave, and that turnover figure goes up.

Turnover = Cost

It’s about time we put a figure on employee turnover cost. How’s this? $1 trillion, every year. And that’s just for US businesses.

It’s clear that this is way too high. But there are ways to bring it down.

The point is, investing in employee retention makes sense for both the employee and the business. By investing in Human Capital Management (i.e., the active encouragement of growth in employees, which is the HCM meaning in HR), a business will reap the rewards.

Putting resources into a wide array of areas such as training, development, and recreation results in greater engagement from the workforce. And greater engagement leads to better performance and higher retention, which leads to better results and lower overall costs all around.