The true costs of employee turnover

From Apple’s revolutionary smartphone to Ford’s reinvention of the automobile, human brilliance and dedication is the only way companies achieve amazing things.

That’s why struggling to retain talented people can drain an organization’s potential. We know turnover is expensive, but its costs aren’t just financial: They manifest as lost productivity, decreased innovation, weakened team bonds, and reduced agility.

As of 2019, American companies were losing a staggering trillions dollars a year turn around. Worse yet, that number may not even capture the true cost of replacing skilled employees.

And turnover has only increased with the labor market disruption of the last three years. Going forward, Gartner has recommended that enterprises prepare for 50-75% higher turnover than pre-pandemic levels, and estimated that roles are taking 18% more time to fill.

Direct and indirect costs of billing

HR professionals already know how costly turnover can be. As a general rule of thumb, it costs 33% of a person’s annual salary to find, hire and train a replacement.

But many talent experts don’t think that number is even close to what turnover actually costs companies. According to the Society for Human Resource Management (SHRM), turnover costs can triple or even quadruple the salary of the departing employee, especially if he was in a highly specialized or high-level position.

It takes a lot more effort (and money) to find great talent than the immediately obvious “direct costs” that we’ll break down below. Human resources expert Edie Goldberg shared with SHRM that these expenses are often less than half of the actual cost of billing. As much as 60-70% is hidden, or ‘indirect costs’, which have far-reaching implications at many levels of an organization.

Direct turnover costs

Direct turnover costs are related to finding, hiring, and training a new employee, as well as overseeing the exit or ‘unplugging’ process of the person leaving. Direct costs can be monetary, but they can also take the form of staff time or other resources.

  • Recruitment and Hiring
    • Post job ads
    • work with recruiters
    • Time spent evaluating applications
    • Time spent interviewing candidates.
  • Onboarding and training
    • orientation session
    • Time invested in training.
    • Low productivity during training
    • Resources and training materials
  • disassociation
    • exit interview
    • Lower productivity during the output period

Indirect turnover costs

Indirect costs are related to these same processes. But they are harder to quantify, affect more people within an organization, and can have potentially longer lasting effects.

Loss of institutional knowledge and experience

The knowledge and skills of the departing employee, such as the special processes they relied on, might not be adequately captured in other parts of the organization. Or, other people may not have realized the impact they had.

Damage to team morale and commitment.

Especially in small or tight-knit teams, it can take a long time for the remaining employees to feel comfortable with a new person and reach the same level of agility and collaboration they had before.

Investment of leadership and management time

Especially if the position being filled is critical or senior, senior management and leadership are likely helping with the process, and perhaps even attending multiple rounds of interviews. That commitment of time and resources can divert attention of other important goals.

Strategies to reduce unfortunate turnover

The best way to reduce turnover costs isn’t to make hiring cheaper, it’s to make fewer people want to leave in the first place. Fortunately, most of the factors that can make a workplace more attractive are, to some degree, within the control of employers.

according to recent Qualitrix researchThe main factors driving the intention of North American employees to remain with their current employer are:

  • Perceived ability to achieve career goals.
  • Alignment of the organization with its values
  • Fair compensation
  • Benefits that meet your needs.
  • Seeing a bright future for the organization

Here are some strategies organizations can use to reduce turnover, increase retention, and hold on to their best people.

Invest in onboarding

Too often, onboarding is all about the business: educating new hires and giving them the tools they’ll need to perform well.

While that’s certainly important, research has shown that a more personalized and employee-focused onboarding model will increase retention, making new hires up to 32% less likely to quit.

Prioritize transparency

Nobody likes to feel like a cog in the machine. Radical transparency and open communication help people feel more connected to each other, to their company, and to the larger goals they are working toward.

Pay transparency is a major trend for 2023, But it goes much further. Use OKRs to connect people’s work to company-wide initiatives, and use regular 1-1s and check-in not only to manage performance, but also to anticipate burnout and gauge morale.

Employee-Centric Flexibility

We know that people want flexible work. But that can mean different things to different people, and not everyone wants the same kind of flexibility!

Don’t make assumptions: talk to employees and ask them what kind of flexibility they really want. For example, someone might value the flexibility of the location in order to achieve their travel goals. But a busy father may prefer the autonomy of time, to be able to adapt to the school and extracurricular schedule of his son.

Comments, comments, comments

There’s only one way to make sure employees are happy and satisfied: talk to them and see how they’re doing!

Use employee feedback loops to improve the way you communicate with employees and show them that you take their concerns seriously. The basic feedback loop model is to collect information from employees, critically analyze it, take action, and notify people that you have done so.

Also consider going beyond the exit interview. Proactively connect with employees who are considering leaving, or who you suspect are leaving. Be direct: what do they need? What will it take for them to stay?

Proactively prevent burnout

Don’t wait until people are already exhausted to take action. Instead, follow these seven steps to prevent burnout and burnout.

They include watching for signs of burnout, offering flexibility when needed, helping people deprioritize and delegate less important tasks, and emphasizing mental health and wellness as a core value.

employee recognition

If someone never said ‘thank you’, why would you want to keep helping them? That’s the common sense idea behind employee recognition, but to really improve performance, it needs to be done right.

Great employee recognition is personal, genuine, appropriate to the situation, and well integrated into regular workflows.

Strong relationships reduce turnover

The common denominator between many of the above strategies? Clear communication, high trust in the workplace and strong professional relationships.

When people have the opportunity to communicate their needs, and see that their employer wants to meet them, it paints a picture of a brighter future for both them and their organization.

But for managers, staying in touch with dozens of reports and translating those chats into action can seem like a daunting task. That’s the idea behind 15Five’s platform, which gives managers a central space to monitor, organize and take action on their people’s performance and engagement.

Want to learn more? Contact us with any questions or book a 15Five demo today.