Employee Turnover Is Devouring Your Profits – Here’s How to Stop It

by Diana Bailey - August 28, 2018

Like every manager, you know that your employees are valuable–after all, you discovered them. But now that you’ve succeeded in hiring your top talent, it’s easy to assume that your employees look forward to coming into work every day, find satisfaction in their projects, and clock out feeling accomplished.

This is a mistake.

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Employee turnover is an enormous cost that rarely gets circled in red on a spreadsheet. That’s because, unlike other operational costs, it’s difficult to measure just how much an exiting employee costs a company. However, as industries become more reliant on individuals’ knowledge and on innovation over skilled labor, companies are finally realizing the true expense that comes with replacing experienced employees.

Citing 11 research papers over a 15-year period, a paper from the Center for American Progress revealed that the economic cost for replacing a highly-skilled job is 213% of the cost of one year’s salary for that role. Another estimate by the Society of Human Resource Management suggests replacing an employee could eventually consume a cost of up to 5 times the annual salary for that role.

While the math on employee turnover might not be as obvious as other expenses, it is chipping away at the profitability of businesses, one empty desk at time. Employee turnover calculators like this one can give you a real, dollar-and-cents idea of how much you will spend replacing an employee.

To make sense of what hidden costs go into calculating the overall toll of employee turnover, let’s break it down into four tangible, more visible, line items.

1. The Cost of Unfilled positions

One day Fred is working at his desk, taking calls, and the next, he’s gone. But Fred’s clients are still sending in requests, Fred’s projects are still open, and employees who used to turn to Fred for advice are thinking, “Gee, I miss Fred.” According to a 2015 Deloitte study, it takes 94 days to recruit for highly skilled roles (like scientists or researchers) and 70 days for skilled production workers. That’s a long time to go on missing Fred. In the meantime, other employees have to shoulder greater workloads to make sure that the projects that would have wound up on his desk get finished. Some coworkers may have to take on responsibilities outside of their comfort zone and expertise, making them less productive, confident, and engaged.

Open positions also create a counterproductive incentive for you as a manager–instead of taking the time to hire the right person for the job, now you are under pressure to hire whoever you can as quickly as possible. Hiring someone who won’t be the best fit for your company only perpetuates the employee turnover cycle, and costs you more down the road.

The longer a position remains unfilled, the less productive your workforce becomes. Glassdoor estimates that, in the tech industry alone, there 263,586 unfilled jobs that account for $20.1 billion in value.

Aside from the human cost of overworking your remaining employees, an unmanned desk means less output overall.

2. The Cost of Recruiting

Finding new hires has become a complex, winding maze with as many as 40,000 job boards now online. That’s a lot of places to post your job ad, and most of them aren’t free. Leaders like LinkedIn and Indeed might attract qualified candidates, but with per-day pricing models, their budgets can quickly balloon. And smaller companies are even more at risk: according to a Software Advice Industryview report, businesses with fewer than 50 employees spend more on average for every new hire than businesses with 10 times as many employees.

But when it comes to recruitment, it’s not just the advertising that adds up. Recruiting requires the involvement of some of your most senior–and highest-paid–employees. Instead of using their valuable hours to generate revenue for the company, now senior staff must divert their attention to reading resumes, holding interviews, and evaluating candidates. Bringing the right candidate on board also incurs other expenses, like recruiter salaries, relocation costs, and employee referral bonuses. According to RecruiterBox, even hiring a new employee in a service position can cost more than $1000.

Good talent isn’t always easy to come by, either. 65% of recruiters report that the biggest challenge in hiring is a shortage of talent, and companies increased their talent acquisition spending 7% between 2013 and 2014 to meet the drought of viable candidates. With recruiters struggling to find talent to fill their available roles, and the the average cost of a new hire estimated at $4,000, it is in your advantage to stem the flow of employee departures.

3. The Cost of Training

No one knows what to expect at their first day on the job. Whether your company’s training program is a weeklong intensive or a few days of job shadowing, it’s safe to say that your new employee won’t be operating at peak performance for a while. In fact, it’s been reported that it can take one to two years for your new hire to become “fully productive,” or as generative as the employee they are replacing. Even with excellent training, it takes time for a new hire to learn the ropes at a company. Experienced employees have made connections over their years with the company, so they know who to talk to, in which department, to get something done. They also have an institutional memory of what has been done before, and what hasn’t been successful. Often, new employees can be timid when it comes to addressing structural inefficiencies for fear of rocking the boat before they’ve even settled in.

Again, training a new hire requires the assistance of a model employee to show them how things are done. That means one of your star employees is sidelined, and their productivity is diminished, to train someone new. This trainer can also become stressed, frustrated, and overextended as they try finish their own work while double-checking the work of their trainee.

Josh Bersin of Deloitte estimates that over 2-3 years you likely invest 10-20% of an employee’s salary or more in training. And it’s only getting more expensive: according to its 2016 report, The Association of Talent Development states that the average cost of training a new service employee has increased $23 over the previous year. Organizations also spend an average of 33.5 hours training a new hire.

4. The Cost of Workplace Culture

Company culture is typically a facet of operational efficiency that’s hard to quantify. But that doesn’t mean that it makes no difference on your bottom line. Companies with employee engagement programs generate 26% more year-over-year revenue annually, compared to those who do not have formal programs. But when dissatisfied employees leave for other opportunities, all around the same time, the effect on the office atmosphere is obvious. The water cooler rumor mill kicks into overdrive. People find out what competitive salaries departing employees were offered elsewhere and begin to feel undervalued. They might also get distracted–they start to update their resumes and search for job postings, all on company time. When multiple employees find other opportunities within a similar time, it creates a climate of insecurity and doubt. Others start to look around for the exits, too.

Employee turnover doesn’t just affect the company internally–depending on the size of your industry, and how quickly word of mouth spreads, it can affect the perception of your company to potential recruits. Talented job seekers might see a long list of open positions on your careers page, assume that your company has a revolving-door approach to hiring, and look for work somewhere that appears more stable. According to Glassdoor, job applicants read an average of six reviews about a company before forming an opinion about them. If just one of those reviews is written by an unhappy former employee, you might be missing out on applications from talented candidates.

So, what can you do?

If you’d like to prevent an employee exodus before it starts, here are some quick tips to keep your staff happy and motivated.

  • Instill a feedback culture: Earnest, anonymous surveying encourages employees to give their honest, unvarnished opinion about how they feel working for your company. Knowing that you’re listening will go a long way toward making your people feel like a valued part of your organization. And of course, most importantly, make a substantial, visible effort to action changes based on the feedback you receive.
  • Clearly communicate what your company stands for: People want to do work that matters. If they can’t see how their role contributes to a larger mission, they might become demotivated over time. Communicate goals in a way that lets employees at all levels know that what they do on a day-to-day basis makes a difference.
  • Make room for growth and development: Employees need to know that their roles and responsibilities can evolve within the company. If an employee wants to broaden their expertise or learn a new skill, give them the flexibility to grow. As it’s typically less expensive to hire lower-level employees, the benefit here is twofold: your people will feel appreciated knowing that promotion is possible, and you’ll save money by hiring at the bottom as employees at all levels move up the ladder.
  • Give praise: It sounds simple, but compensation isn’t the only way employees know their value. Shining a spotlight on a job well done makes employees feel appreciated, lets them know they’re on the right track, and encourages them to continue doing great work.
  • Ask employees why they’re leaving: An obvious step that’s often overlooked, exit interviews can give you insight into what organizational problems need addressing before it’s too late, show exiting employees that their loss will be felt at the highest levels, and are one last action toward discouraging negative reviews on job sites.
  • Invest in your employees’ sense of worth to your company. A corporate culture that imprints positive feelings of value, importance, and growth on its members will not only impact your bottom line, but make your place of business enjoyable to those at every level.

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