The Cost of Losing an Employee

Posted in Research

It’s no surprise to any of us to know that it is both an expensive and time-consuming process to recruit a new hire into your business. The even more scary point that many don’t think about, is the cost to the business when losing an employee.

In the US, direct replacement costs can reach as high as 50 to 60 percent of an employee’s annual salary, and total costs associated with turnover range from 90 to 200 percent of annual salary, according to SHRM reports. Staff Turnover in the first 12 Months in Australia is costing $3.8 Billion. With these statistics in mind, we wanted to dig deeper into what these costs comprise of, and what you need to be looking out for.

Firstly, why do employees leave an organisation?

Of course, there’s no ‘silver bullet’ when addressing the issue of employee retention - otherwise, this wouldn’t be an article we would be writing! What we have seen, though, is some key trends in why your employees’ mightn’t be staying for the longer term. HR industry studies show that a great amount of staff turnover (possibly as high as 20 percent) can happen within the first 45 days of employment. Some primary reasons are:

  • Recruiters oversell the job
  • Experiencing a poor onboarding experience
  • Lack of clarity surrounding job duties and expectations
  • A bad manager / micromanaging, unprepared managers, management mishaps
  • There’s no room to grow
  • Infrequent check-ins
  • Workplace policies are too rigid / not facilitating work-life balance / hostile work environment
  • Failed to provide proper support to employees.

Recent research by Price Waterhouse Coopers (PWC) found Australia came last in a list of 11 developed countries when it came to staff leaving within 1 year at 23%. So nearly 1 in 4 new employee’s leaves their job before their first 12 months is up!

Why is it so hard to assess the real cost of employee turnover?

As many companies do not have sufficient systems in place to track areas such as recruiting, interviewing, orientation and training, lost productivity and exit costs (as some examples), the real cost of employee turnover is often unknown. To do this well, there needs to be a collaboration between departments, such as operations, finance, and HR, to be able to measure and report these effectively.

With this in mind, what are the costs associated with losing an employee?

There is a range of areas that attribute to costs. These include:

Time to replace a hire

Typically, it takes 8-12 weeks to replace a knowledge worker, and then another month or two before the replacement gets to full productivity mode. A recent study from Bersin by Deloitte (2015) revealed that companies are taking longer to fill positions. 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, however, it is still a frightening statistic.

Time to train a new hire

A smart CEO will put the best people in charge of training a new hire, which takes the most valuable people out of production. That decision impacts 3 people: 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.  Not only this, but It can take new employees 6-9 months before they are productive and profitable.

Lost productivity and engagement

The same Bersin study found that frequent voluntary turnover has a negative impact on employee morale, productivity, and company revenue. The scary thing about this? More than 25 percent of employees are in a high-retention-risk category. On top of this, there is the lost productivity from having open headcount in your team. Once you’ve found a replacement, you will be faced with another 4-8 weeks (at a minimum) before your new hire is fully trained, comfortable, and productive in their new role.

Cultural impact

From a cultural perspective, it is important not to underestimate the feelings that are created within the broader team when voluntary turnover is high. This will impact how long employees’ will plan to stay with the company, as well as lowering morale, as continuity is removed from the team, meaning constant re-adjustments are needed.

External hires demand more salary

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!

Economic Value of an Employee to the Organisation over Time (Bersin by Deloitte)

Client relationships’ compromised

Client relationships’ are often forged off personal experiences. These can be compromised with high employee turnover, and often there is a negative, emotional experience attached to this. The client can even move with the employee if the relationship was strong enough! As well as this, it can have more direct impacts, including projects not being completed on time and a loss of knowledge on product, company and long-term relationships.

How to deal with early attrition?

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. With this in mind, it’s important to think of ways to make sure that your organisation is aware of the potential issues from having high turnover rates.

The first step is to ensure that the wider team understands the full costs (as mentioned in this article) of attrition to the business. If they understand this, they’re much more likely to care about retention rates.

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 culture, processes, and values. The first 6 months are crucial, so make sure you get it right.

Think about using an automated, online onboarding process to not only reduce the admin burden on managers but also to allow new starters to get set up in your organisation quickly and without the inconvenience of paperwork.

We recommend reading: ‘Treating employees like customers’