Employee Retention - The Real Cost of Losing an Employee

From PeopleKeep-By Christina Merhar

For organizations to thrive in today’s economy, finding and retaining the best employees is vital. This is especially challenging for small businesses and nonprofit organizations who must compete with larger businesses, and larger budgets, for top talent. Benefits play a large role in employee retention, and employees want benefits personalized to their needs.

Happy employees help businesses thrive

Frequent voluntary turnover has a negative impact on employee morale, productivity, and company revenue. Recruiting and training a new employee requires staff time and money. According to the Bureau of Labor Statistics, turnover is highest in industries such as trade and utilities, construction, education and health services, and leisure and hospitality.

The cost of employee turnover

While the exact costs of employee turnover vary, there’s no question it’s something employers need to manage.

Some studies predict that every time a business replaces a salaried employee, it costs 6 to 9 months’ salary on average. For a manager making $60,000 a year, that's $30,000 to $45,000 in recruiting and training expenses.

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

• 16 percent 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 percent of annual salary for midrange 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 percent of annual salary for highly-educated executive positions. For example, the cost to replace a $100k CEO is $213,000.

Is employee turnover still relevant?

According to a study from the Work Institute, a shocking 42 million US employees left their jobs voluntarily in 2019—27% of the workforce. This was an increase of over 2 million in 2018, which saw 40 million voluntary departures and an increase of over 88% since 2010.

So what is the real cost of losing an employee?

In an insightful article on employee retention, Josh Bersin of Bersin by Deloitte breaks down key factors that contribute to the costs of losing an employee.

These factors include:

• The cost of hiring a new employee including the advertising, interviewing, screening, and hiring.

• The cost of onboarding a new person, including training and management time.

• Lost productivity—it may take a new employee one to two years to reach the productivity of an existing person.

• Lost engagement—other employees who see high turnover tend to disengage and lose productivity.

• Customer service and errors—for example, new employees take longer and are often less adept at solving problems.

• Training cost—for example, over two to three years, a business likely invests 10 to 20 percent 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 that most companies don't have systems in place to track exit costs, including recruiting, interviewing, hiring, orientation and training, lost productivity, potential customer dissatisfaction, reduced or lost business, administrative costs, and lost expertise. This takes collaboration among departments (HR, Finance, Operations), tools to measure these costs, and reporting mechanisms.

Best practices on employee retention

So, what can you do about employee retention?

Some employee retention tips include:

• Benchmark your employee retention rate.

• Use proven retention strategies, not guesswork.

• Don't assume employees are happy (foster a high-feedback environment).

• Implement a health benefits program, like a health reimbursement arrangement (HRA)

• Conduct exit interviews.