What is the Cost of Employee Turnover for your Business?

Posted in Organizational Development

Recruiting a new hire is an expensive and time-consuming process. But few consider the cost of losing an employee. Let’s break down the costs associated with attrition, and what HR and businesses can do about it.

In the US, when an employee quits, businesses spend 50 to 60 percent of the employee’s annual salary to replace them, while the SHRM reports that the actual, total costs associated with individual turnovers can range from 90 to 200 percent of the employee’s annual salary.

The situation is not much better Down Below either – employee turnover is reported to have cost Australian businesses $3.8 billion over 12 months. It’s clear: we’re talking about a common problem here, with high costs common across most industries. Let’s break down what these costs and business impacts are, and what you could do to limit the impact.

Top 8 reasons why employees quit (and why the “honeymoon” is actually more like a job trial)

Bad news first: when facing the issue of employee retention, there really is no “silver bullet”. However, many HR experts have done studies on why (and when) employees leave. This might be of particular interest if you are finding that staff members aren’t staying for the long term.

One finding is the first 45 days of employment is a “high risk” period – a great amount of staff turnover (in fact, as high as 20 percent) occurs during what we usually think of as the “honeymoon”. So what are the most common reasons for this turnover?

  1. The job was oversold (thanks, recruiters!)
  2. A poor onboarding experience eroded the newcomer’s confidence in the company
  3. Lack of clarity surrounding job duties and expectations
  4. A bad manager / micromanaging, unprepared managers, management mishaps (we all know that quip – people leave managers, not companies)
  5. They found there is no room to grow
  6. Infrequent check-ins
  7. Workplace policies are too rigid / not facilitating work-life balance / hostile work environment
  8. The organisation did not provide proper support to employees.

So if the new staff member stays past the first 45 days, that means we’re safe, right? Wrong. Recent research by Price Waterhouse Coopers (PWC) found that in Australia, 23% of new employees leave their job within their first 12 months.

What this means: when it comes to managing expectations and experiences of new hires, consistency and long-term engagement matters. This is something that needs to be owned by both HR and managers.

Employee turnover: why it’s so hard to assess the real cost

Even though analytics and metrics have brought transparency to many parts of organisations, many businesses still do not have the systems in place to track HR-related areas such as recruiting, interviewing, orientation and training, lost productivity and exit costs. Without measurement, the real cost of employee turnover is often unknown.

Over the years, it has also become clear that collaboration is key: there can be no real or effective measurement of these areas if departments like operations, finance and HR don’t work well together.

Breaking down the 6 costs associated with staff turnover

1) Time to replace a hire

Typically, it takes 8-12 weeks to replace a knowledge worker, and then another month or two to ramp the new staff member up to full productivity. A recent study from Bersin by Deloitte (2015) revealed that companies are taking longer to fill positions. In fact, the time it takes to fill a position has increased over the last four years. In 2011, companies filled vacant positions in 48 days, but now Bersin has found that it takes an average of 52 days to fill an opening. This timeframe is shorter for entry-level positions and progressively longer for positions higher up the career ladder, but the trend is worrying.

2) Time to train a new hire

A smart CEO will put the best people in charge of training a new hire, which impacts on the production capacity of (often) the most efficient staff members. Training is a necessity, but there are at least three people that are affected by this: the trainer, their manager and the trainee. During the new hire’s first 3 months, those hidden labour costs can quickly add up to tens of thousands of dollars. Even when training is done, new employees will still take 6 to 9 months before they are productive and profitable.

3) Lost productivity and engagement

The same Bersin study found that frequent voluntary turnover has a negative impact on employee morale, productivity, and company revenue. Another startling finding from the study is that in a given organisation, more than 25 percent of employees can be categorised as flight risks. We should not discount the lost productivity associated with having an open headcount in the team, and the resultant lack of capacity, nor the impact that comes when continuity is removed from the team. As mentioned in 2), even when they are replaced, it will take a minimum of 4 to 8 weeks before your new hire is fully trained, comfortable, and productive in their new role.

4) Cultural impact

This is related to morale, but high voluntary turnover can have a real impact on the organisation’s culture. This has ripple-on effects, not just due to reduced morale from the remaining team members, but also from employee expectations in regards to how long they should plan to stay with the company.

5) External hires are more expensive

According to the University of Pennsylvania, external hires demand 18-20% more in salary than internal hires. This is not only the upfront cost – think about the flow on effects when coworkers discover the difference in salary! Fig 1: Economic Value of an Employee to the Organization over Time (C) Bersin by Deloitte

6) The impact on client relationships

While we try to keep things professional, many client relationships are based on working closely with small teams or individuals within your organisation. High employee turnover means these relationships are reset and thus compromised, ultimately eroding the client’s relationship with your business. We’ve all heard stories of clients moving with the employee. Even if the turnover event does not result in the loss of a client, other direct impacts include slippage in the timeline of projects, breaching of deadlines, as well as the usual productivity issues with interrupting continuity.

Reduce turnover in three steps

In a study of over 1000 workers, 31 percent reported having quit a job within the first six months. That’s 1 in 3 employees who don’t stay for longer than 6 months. This high turnover rate is a concern in any organisation, so it’s important to not only be aware of it, but be actively dealing with the issues or circumstances that can lead to this.

  • The first step is to ensure that the team, at all levels, understand the full costs of staff turnover. This article illuminates some of those. By tying the issue with real business metrics and impact, it makes more sense for them to care about it.
  • The second step is to build a solid onboarding program, to ensure that each new hire receives an experience that is welcoming and memorable. Make managers accountable and involve them in the process. Socialise employees into the company’s culture, processes, and values. Ensure your program engages with the employee from the time the contract is signed, through to their first day, and then beyond that, into their crucial first 6 months.
    Tip: If you are interested in finding out more about how you can build an outstanding onboarding program, we’ve got an awesome free guide about that. Check it out and download it here!
  • The third step is to think innovation – how can you standardise the onboarding and employee engagement program you thought up of in step 2? Consider using an automated, online onboarding process to not only reduce the admin burden on managers but also to allow new starters to get setup in your organisation quickly and without the inconvenience of paperwork.

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