Employee Retention: What Employee Turnover Really Costs Your Business and What to Do About It

It is one of the biggest costs in all different types of organizations, but it is also one of the most unknown costs. It’s employee turnover.

Businesses routinely record and report costs such as wages and benefits, workers’ compensation insurance, utilities, materials, and space; however, most companies do not have and report the cost of employee turnover. It may be much higher than you think.

How much is it costing you?

Several well-regarded studies have recently estimated the cost of losing an employee:

o SHRM, the Society for Human Resource Management, estimated that it costs $3,500.00 to replace an $8.00 per hour employee when all costs were considered: recruiting, interviewing, hiring, training, reduced productivity, etc. SHRM’s estimate was the lowest of 17 nationally respected companies calculating this cost!

o Other sources provide these estimates: It costs you 30-50% of annual salary for entry-level employees, 150% for mid-level employees, and up to 400% for high-level specialty employees!

o Do a quick math: Think of a job in your organization where there has been some turnover, perhaps supervisors. Calculate your average annual salary and the number of supervisors you lose annually. For example, if your average annual salary is $40,000, multiply that by 0.125% (or 125% of your annual salary, a reasonable cost estimate for supervisors). This means that it costs $50,000 to replace a single supervisor. If this company loses ten supervisors a year, then 10 times $50,000 equals $500,000 in replacement costs for the supervisors alone. This is the final cost. The cost of the top line? If the company’s profit margin is 10%, then it costs $5,000,000 in revenue to replace these ten supervisors.

Do these numbers seem unbelievable?

Here is an actual estimate from a well-regarded organization in my community. The HR Manager of this human services organization (housing for the disabled, sheltered workshops, etc.), estimated that 30 entry-level people leave his organization on average each quarter.

This averages ten people per month. Let’s be more conservative and lower the SHRM estimate (see above) to $3,000.00 to replace each employee.

This equates to $30,000 per month, or $1,000.00 in employee turnover costs every day of the month! Annually, this amounts to $360,000.00.

Actual turnover costs are often much higher than we think they are, until we estimate them.

You may be thinking, “Some employee turnover is inevitable, even desirable.” Are you okay. Some turnover is necessary to replace poor or marginal employees with more productive ones and to bring in people with new ideas and experience. However, high turnover costs are avoidable and unnecessary. This is where companies should focus their efforts. The goal is to retain valuable employees and replace poor ones.

Most companies lump both types of artists together when looking at billing. In doing so, they miss the cost and importance of replacing the ones that perform well.

Why don’t more companies see this as a costly problem?

There are a variety of reasons why this isn’t seen as a problem, all of which cost companies in experience and dollars. How many of these occur in your organization?

1. There is no process to tabulate costs. One survey found that only 44% of respondents had a process to estimate turnover costs; 43% of companies relied on intuition and 13% had no process at all. (1)

2. Costs are not reported to top management. It’s a business truism that one of the best ways to get the attention of senior management is to show them what something costs. However, most top management never gets to see turnover cost estimates because most companies don’t measure them, or if they do, they don’t report them to top management.

3. It is an inescapable cost of doing business. Except it isn’t! While some turnover is inevitable and desirable, most turnover, especially among your best and best employees, is largely avoidable. Thinking that turnover is just a normal cost of doing business is the same quality of thinking that says accidents are just an inescapable part of being in the construction business.

4. It is a human resources problem. While HR should be a key partner in reducing turnover costs, this is a strategic issue that requires top management attention and action, in addition to HR efforts, to resolve.

5. Costs are underestimated, so they are less of a concern. If costs are underestimated because the organization disagrees or doesn’t know what to measure, the statistics generated record less concern than they should or are disputed and ignored.

What costs must be fully estimated?

A comprehensive program measures the following costs:

exit costs

Recruitment

interview

hiring

Orientation

Training

Compensation and benefits during training

lost productivity

customer dissatisfaction

Reduced or lost business

Administrative costs

lost experience

temporary workers

There should be prior agreement between Human Resources, Finance and Operations on what cost measures will be considered valid. Then, it has to be measured and reported.

6. Wait until there is a crisis. She surprised me when the CEO of an organization told me that she knew that one of her competent managers was unhappy, but she decided that no action was necessary because she had not yet received a letter of resignation.

Prevention is what works best. Start measuring your turnover costs and, very importantly, look at who’s leaving so you know if you’re retaining your best people.

The time to do this is now. Waiting until there is a crisis to take action limits your options and your rate of success. It also often triggers the common response of offering more money for someone to stay, instead of fixing the original problem. Why do so many retention efforts fail?

Here are some of the most common reasons why company retention efforts fail, even when implemented by capable people.

1. There is no evaluation, so ineffective solutions are chosen. In their rush to correct a costly problem, companies often forget to conduct a relatively short and cost-effective assessment to correct the situation faster. However, implementing a solution without diagnosing who is leaving and why often results in solutions that are unable to address the root causes behind churn.

Diagnosing the reasons behind the turnover is always worthwhile. Don’t start without an evaluation.

2. Implement too many solutions instead of the most effective solutions. Managers often brainstorm a number of plausible solutions and then implement many of them, especially those favored by top management. However, what is most needed is to select and implement a limited number of solutions that are most effective in solving the problem. Implementing too many solutions, even good ones, will spread out your resources and undermine your efforts and success.

3. There is no way to measure success to know what works. How do you know which retention solutions you’ve implemented are working effectively and which aren’t, where you need to make improvements, and which strategies you should abandon if you don’t have a way to measure your results?

How do we do a better job of retaining employees, especially the most valuable ones?

First, classify your employees into three categories: Top performers, Average performers, and Lowest performers. Your goal is to retain your best employees; develop and retain your average performers, turning them into high or near-high performers if possible; and potentially replace your underperforming employees.

Second, agree internally on the measures you will use to calculate turnover costs. Be sure to factor in all costs. Most organizations greatly underestimate them.

Third, report turnover costs to top management monthly, quarterly, and annually.

When turnover costs are unacceptably high or higher than your industry average, take stock. Find out who is leaving and why they are leaving. Exit interviews can help you find out why.

You need to know if your high-, mid-, or low-performing employees are leaving so you can gauge the level of experience leaving your organization. Obviously, you’ll employ (and pay for) different strategies if your best employees leave voluntarily, compared to low- or mid-level employees.

Develop solutions capable of solving the problems you discover and only implement a limited number of them.

Measure the success of your retention efforts and refine them.

Two very key strategies to save a great deal of time and money.

Very Key Strategy #1: Don’t wait until turnover costs become unacceptably high before implementing an ongoing retention program. Put a retention program in place before you have a crisis situation. Not only do you need to find out why employees leave your organization, you also need to find out why others stay.

Very Key Strategy #2: Survey your top performers now to find out what keeps them there, why they might leave, what kinds of competitive offers they might find appealing, and what they need to be happy and more productive at their jobs. You’ll do a better job keeping them (along with your experience and value). You will also find very beneficial information on the improvements your organization needs.

This means driving improvements in your organization by what your best people tell you, rather than focusing on dealing with the ever-present complainers in every organization.

How valuable are retention efforts? One source estimated that a 10% reduction in employee turnover was worth more money than a 10% increase in productivity or a 10% increase in sales.

Hold and win.