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The US has seen a huge surge in employee turnover over the last few years—commonly known as “The Great Resignation.” Plus, with a recession looming, many companies have laid off a large number of workers, further increasing their turnover rates.
Losing your top talent reduces productivity and, in turn, company revenue. And that’s not all. You then need to re-hire and train new employees, which also adds to your expenses. Moreover, high turnover can lower team morale and damage your company’s reputation with workers and customers.
That’s why you need to fully understand what the true cost of employee turnover is before making decisions on retaining workers or letting them go. In this guide, we explain how to calculate the cost of employee turnover and share our top tips for retaining your best workers.
- Employee turnover refers to the number of workers exiting a company in a given time period.
- Turnover reduces productivity and revenue. Plus, it’s expensive to hire and train new employees.
- You can calculate turnover costs using real company data or benchmarking studies. A handier solution is Connecteam’s cost of turnover calculator.
- There are many hidden costs to turnover. For instance, poor team morale can lead to low productivity, and you can lose customers from the damage to your company’s reputation that turnover may cause.
- You can reduce turnover by offering better pay, benefits, and growth opportunities to your workers.
What Is Employee Turnover?
Employee turnover refers to the number of workers who leave a company, whatever the reason may be. This includes:
- Voluntary exits: When workers decide to resign from your company. This could be to move to a new company, take a career break, pursue further education, and so on.
- Involuntary exits: When the company decides to terminate an employee—e.g., through dismissals or layoffs.
- Other attrition: This refers to exits that are due to reasons such as an employee’s retirement, relocation, death, etc.
Employee turnover is usually tracked by calculating your turnover rate for a specific time period. For instance, your turnover rate for a year will be:
(The total number of employees who exited the company / The total number of employees who were employed during that year) x 100
This formula can be used to calculate overall turnover rates for your company. Or, you can calculate turnover rates for specific teams, locations, reasons for leaving, and so on to identify areas of concern in the company.
Why You Should Understand the Costs of Employee Turnover
It’s important for a business to calculate its turnover cost and gain insight into the underlying reasons for turnover. Knowing your turnover cost can help you:
Refine your retention strategy
Calculating the cost of turnover helps you identify and address areas of concern when it comes to retention.
For instance, you may learn that you’re losing more revenue because your top performers are exiting. In this case, you’ll need to find out why your top talent is leaving and make amends to fix this.
Similarly, you could find that turnover costs are higher for a specific team due to needing specialized skills. This makes hiring and training new employees expensive. You may want to consider doing more to retain workers who are more costly to replace.
In this way, identifying what’s driving the costs of turnover can help you figure out where to focus your retention strategies.
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Calculate the return on investment (ROI) on your employee programs
Every company spends a certain amount of time, effort, and money on engagement and retention initiatives. This could be training, company events and team offsites, recognition programs, and more.
Knowing your turnover rate and cost of turnover can help you assess the effectiveness of your employee programs. Something is likely going wrong if you’re spending a lot of money to retain your workers but have a high turnover rate.
Calculate the costs of turnover across different teams, locations, and more to identify where the issue is arising. For example, when comparing turnover costs across “reasons for leaving,” you may find higher costs coming from dismissals. You’d then need to address a deeper cultural issue in the company and understand why workers aren’t following the company’s working code.
Know the full implication of employee layoffs
Many companies think layoffs are the most effective way of cutting costs. While this may be true, you need to accurately estimate the cost of layoffs before making a decision.
For instance, you may have to pay hefty sums in severance to your laid-off workers. Additionally, a reduction in a large number of workers can hamper business operations and halt productivity.
Calculate what the cost of laying off workers would be and compare it to the money you might save. If you would benefit financially long-term from your layoffs, then you can be sure that your decision is financially sound. You can also use this data to support your decision when communicating with stakeholders.
Alternatively, you may find that it doesn’t make good financial sense to lay your workers off. This is often the case when layoffs are likely to be quickly followed by the re-hiring and training of new workers.
Make better hiring decisions
Breaking down turnover costs can help you see how much you’re spending on hiring and onboarding new employees.
Hiring and onboarding expenses can significantly impact your bottom line and reduce profitability. Understanding these costs can help you decide on your course of action.
You could, for instance, reduce these costs by spending more to retain your existing workforce. You might also reevaluate your revenue streams to see if there are roles that don’t need to be backfilled. Or, you could explore “quiet hiring,” where you fill roles with your existing workers rather than hiring externally.
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Reassure customers, stakeholders, and existing employees
Employee turnover comes with some indirect costs for your business. High turnover rates can damage your reputation in the job market and with customers. Knowing this in advance can help you provide information and assurance to others involved in your business.
For instance, you could email customers and investors in advance to explain what’s happening at the company. Reassuring your remaining workers can also help uplift morale when there’s a higher rate of attrition than usual.
How to Calculate the Cost of Employee Turnover
There are 3 methods you can use to calculate the cost of employee turnover in your company.
Calculate individual financial costs to your company
In this method, calculate the cost of losing an employee by looking at:
- The difference between output levels before and after the employee left the company. You can then multiply this by the price of the product or service to estimate what revenue was lost due to vacancy.
- The cost of recruiting and training a replacement. Look at factors such as how much you paid a recruiter to hire someone—including fees in advertising roles. Also, consider the cost of training and onboarding. This includes internal or external training manager fees, travel costs, admin costs, and so on.
You can then add the above costs together to calculate your turnover cost for a specific worker.
However, while this method is customized to your company, it’s manual and time-consuming. It’ll take even more time and effort to use this method for every worker that leaves.
Moreover, it isn’t always straightforward to accurately calculate output levels, training costs, and so on. For example, knowing exactly how much of your training manager’s pay is attributed to training new hires can be complex.
Use studies to estimate turnover costs
Using this method involves looking at historical data and research studies to estimate turnover costs. There are plenty of studies online that look at turnover costs by location, industry, employee type, and other factors.
For example, Gallup estimates that the cost of replacing a salaried employee in the US is about 1.5 to 2 times their salary.
Investopedia estimates it’s also expensive to replace hourly workers—around $3,500 to replace an employee who had a wage rate of $8 per hour.
Meanwhile, Harvard Business School showed that it takes over 6 months for companies to earn back their investment in replacing mid-level managers.
This method is less time-consuming than manual calculations. But it does require you to sift through many pages of research to find studies that align with your company, industry, location, etc. in order to get the most accurate estimations.
Use a turnover calculator—like Connecteam’s
The easiest and quickest way to calculate turnover costs is by using a turnover calculator.
You can use Connecteam’s free cost of turnover calculator to estimate the impact of turnover in minutes. It doesn’t take much time, effort, or extra research.
Here’s how to use it:
Step 1: Enter your total number of employees—from 1 to 1,000. While this doesn’t contribute to the cost of turnover, it helps show you your turnover rate. This is an important metric, as it helps you identify if you have more attrition than expected or compared to other companies in the industry.
Step 2: Input the numbers of departing/departed employees in that year. Connecteam’s calculator is customizable, so you can estimate turnover costs for anywhere between 1 to 500 employees in one go.
Step 3: Put in the average monthly salary for all your departing employees in that year. You can calculate this using the below formula:
Total monthly salary paid for all departing employees / Number of departing employees that year
Connecteam lets you input any average salary number between $1,000 and $5,000 per month.
Step 4: Enter the number of weeks—between 1 and 12—that it takes to hire a replacement employee.
Step 5: Connecteam uses all the above information to give you your turnover rate. Further, it estimates the cost of turnover to your company easily and instantly, with no manual calculations.
The calculator shows average turnover rates for different industries. These benchmarks are a great way to compare your turnover rates to similar companies.
What Are the Hidden Costs of Employee Turnover?
Employee turnover has many intangible costs that can have a huge impact on your business. These include:
Poor team morale and burnout
Losing coworkers can be very demoralizing for a team. Employees who’ve built strong connections with departing colleagues could take some time to adjust to the change.
Another factor is that high turnover—especially during layoffs—can create stress among workers. They’re likely dealing with losing their coworkers and are worried about their own job security.
Until a role is replaced and the new hire is fully trained, the remaining employees also have to work harder to meet deadlines. This can create a sense of resentment and lead to burnout at work.
Overall, poor team morale can lead to more exits and considerably increase your turnover costs.
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Damage to company reputation
High turnover rates can negatively impact a company’s image among employees, external talent, and customers. Workers may experience low morale and begin to doubt the company’s leadership if they see a lot of exits.
The same can be said for prospective employees, who are unlikely to join a company with a high turnover rate.
Finally, customers and investors may question your stability and financial health when turnover is high. This can jeopardize your working relationships.
Business disruption and errors
When employees leave, so do their skills and institutional knowledge. This can result in a disruption to business operations. You’ll find a drop in work quality, increased errors, missed deadlines, and more.
This loss in productivity can be expensive, as it can cause a loss of revenue you won’t recover until another worker is hired and fully trained.
Poor customer service and loss of clients
Disruption in business can damage your reputation with present and future customers and cost you their business. On top of this, low morale in your remaining workers can also result in poor customer service.
Sometimes, a business can even lose customers who move to the next company with a departing employee. All of these factors can lead to a loss of sales for the company.
Why Employees Quit
Involuntary exits—such as layoffs or natural attrition due to retirement—either benefit the company long-term or are out of your control. However, voluntary exits, such as when an employee quits, should be addressed.
Below are just some of the reasons why today’s workers are quitting their jobs.
Employees’ priorities have shifted
Employee priorities have shifted since then, with more people valuing their personal lives more than ever before.
This helps explain why many workers are taking time off, retiring early, taking sabbaticals, and leaving jobs that don’t offer the flexibility they’re after.
They’re dissatisfied with their pay
A Pew study showed that 70% of workers who quit did so because they were unhappy with their pay.
When workers don’t feel compensated fairly for their jobs, they’re unlikely to stay with the company. Even if they do stay, they don’t go above and beyond in their roles and are often mentally checked out of their work—this is called quiet quitting.
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Workers are unhappy in their jobs and with the company
Without challenging work, employees are more likely to be disengaged from their roles and will look for jobs in other companies.
Furthermore, today’s workers want jobs that are meaningful and have some purpose—whatever that may be. They won’t stick with your company if they’re not clear on the company’s mission or can’t relate to the company’s values.
Additionally, factors such as poor relationships with their managers or peers create a negative working environment for employees. Also, workers who feel like they’re not being heard and their feedback isn’t being taken seriously are more likely to feel dissatisfied with the company and its culture. Thus, they’re more likely to quit.
They face a lack of growth and career opportunities
Research by Pew has shown that employees’ top reasons for leaving also included a lack of career advancement. Today’s workers place a high value on professional development. Companies that don’t support employees’ careers through training, job moves, and promotions are more likely to lose their top talent.
The Solution to Employee Turnover
Below, we’ve provided some proven retention strategies for decreasing turnover levels.
Provide better pay and employee benefits
One of the best ways to retain your talent is to offer them a pay rate that makes them feel valued.
If your budget allows for it, consider paying slightly above market to give them that extra incentive to stay. You can also offer benefits such as medical or retirement insurance to increase your attractiveness as an employer.
For companies with a lower budget, focus more on non-monetary benefits. For example, you can provide generous paid time off (PTO). Additionally, allowing flexible scheduling helps workers benefit from a better work-life balance. These perks go a long way in maintaining a happy and loyal workforce.
Support employee growth in-house
A LinkedIn report showed that 94% of workers would stay with their company longer if they had development opportunities. Thus, it’s important to provide them to your workers.
Offer mentorship, training courses, promotions, and other development opportunities so they stay engaged and don’t feel the need to find growth elsewhere. Read more about trends for employee engagement to find the right fit for you.
Help employees find purpose in their work
Ensure that your employees understand the company’s mission and how their work contributes to it. For instance, remind them of company goals regularly and give them feedback on how they’re aligning with these goals.
Also, consider recognizing and rewarding employees for excellent work. This makes them feel valued and keeps them motivated.
You can also help them feel more fulfilled by providing opportunities such as volunteer days that can enable them to do purposeful work, even if it’s not directly linked to their role. This way, employees can continue to find meaning in their work through the company.
Finally, regularly check in with workers and see how they feel about their roles. If they’re bored, consider providing horizontal move opportunities that will allow employees to be challenged in a new role. If they’re struggling, you can provide additional support.
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Stay connected with employees and listen to feedback
Communicate regularly with your team so they feel heard and valued. Gather their honest feedback through one-on-one meetings, focus groups, and surveys. This can give you valuable insights to drive a meaningful retention strategy.
Also, ensure that you conduct exit interviews with employees who quit to understand why they’re leaving and what you can improve. This way, you can make the necessary changes to company culture and support other employees who’re at risk of leaving.
Employee turnover refers to the number of employees who exit from a company within a period of time. High turnover can be extremely costly for your business.
You can calculate turnover costs by looking at the numerical costs associated with losing and replacing an employee. You can also look at benchmarking data to estimate the rough cost of turnover for your company. However, the best way to calculate the turnover cost is by using Connecteam’s cost of turnover calculator. This quick, digital calculator is less time-consuming than other manual methods.
Employee turnover also has several hidden costs that you need to factor in. High employee turnover is detrimental to business operations, team morale, and your reputation with customers, so it’s important to understand and assess turnover regularly and make improvements where needed.
Finally, you can reduce employee turnover by offering better pay and benefits to workers, and by ensuring that they have good career opportunities and feel fulfilled in their roles. These solutions can help you retain top talent and reduce the cost of turnover for your business.
What is the cost of employee turnover in different industries?
Many studies online show you the average cost of turnover for specific industries. Find the industry you’re interested in and gather information using a search engine. If you want to save time, you can use a turnover calculator like Connecteam’s, which helps you see turnover rates, costs, and industry benchmarks.
What is the cost of employee turnover for full-time employees?
Several studies have estimated the cost of losing a full-time employee. Some studies indicate that it costs a company 1.5 to 2 times the employee’s salary. Another study found that the cost can be over 200% of an employee’s salary if the employee is in a C-suite role—i.e., a leadership position.