What Was Management Thinking? The High Cost of Employee Turnover

An article from Forbes made the rounds last summer with some pretty startling statistics:

  • The average raise an employee can expect is 3 percent, but given the cost of inflation, it actually amounts to more like 1 percent in additional spending power.
  • If an employee leaves a company, however, they can look forward to a 10-20 percent increase in salary. In extreme cases, they may even see as much as a 50 percent bump.

In other words, we’ve cultivated a system in which employees who are loyal to their companies are financially punished and those who jump ship every few years are financially rewarded.

What turnover really costs

The cause? Well, one culprit is certainly antiquated HR tactics that only allows raises as a certain percentage of the employee’s current salary, regardless of external market conditions. Others argue that employers are not equipped to rapidly promote, develop, and reward their employees in ways that aren’t simply monetary.

But regardless of the reason, what this information exposes is a fundamental lack of understanding about what turnover really costs an organization. When you consider all of the costs associated with employee turnover – including interviewing, hiring, training, reduced productivity, lost opportunity costs, etc – here’s what it really costs an organization:

  • For entry-level employees, it costs between 30-50 percent of their annual salary to replace them.
  • For mid-level employees, it costs upwards of 150 percent of their annual salary to replace them.
  • For high-level or highly specialized employees, you’re looking at 400 percent of their annual salary.

The costs of turnover adds up fast

Let’s play a game called “Fun With Math.” A business loses 12 employees in one year, averaging one per month.

  • Six of these employees were entry level, with an average salary of $40,000. It costs, on average, $16,000 to replace each employee at 40 percent of their annual salary, for $96,000 total.
  • Four of these employees were mid-level, with an average salary of $80,000. It costs, on average, $120,000 to replace each employee at 150 percent of their annual salary, for $480,000 total.
  • Two of these employees were senior, with an average salary of $120,000. At 400 percent of their annual salary to replace them, you’re looking at almost $1 million, specifically $960,000.

Add everything up and you’re looking at costs of over $1.5 million to replace just 12 employees. Numbers seem high? Fair enough – there are organizations that estimate replacement costs to be lower.

The conservative estimate is pretty bad, too

So let’s cut the cost of replacing all of those employees to the lower end of what it costs to replace an entry-level employee – 30 percent – across the board. Here’s how it breaks down:

  • It’s going to cost your company $72,000 to replace the six entry-level employees.
  • It’s going to cost your company $96,000 to replace your four mid-level employees.
  • It’s going to cost your company $72,000 to replace the two senior employees.

That means that at the absolute lowest estimated end of the spectrum – your best case scenario – you are looking at almost $250,000 as the cost of the turnover of just 12 employees.

If your company has a quarter of a million dollars that it can just light on fire at the next office BBQ social activity, then maybe you don’t really need to invest in these areas. But my guess is that the vast majority of companies are simply not in that position. It costs less to retain than it does to replace.

When a raise is really an insult

I once had a job where I had experienced an absolutely miserable working environment for months. At the same time, I had been able to advance a number of initiatives that had made a real impact, and I’d been able to do it with an absurdly small budget – one that was less than 0.5 percent of what the company thought it would take to outsource the same project.

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I knew it, and the company knew it. They wanted to keep me there and working, and to reward me for my efforts in a miserable working environment, I received a $2,000 raise. This amounted to less than 3 percent of my overall salary, and was so small that I barely noticed the difference in my paycheck.

I didn’t ask for the raise and, frankly, wasn’t really expecting it. But when I received it, it did more to reinforce how little the organization valued me than it did to increase my morale. I had saved the company hundreds of thousands of dollars, and simple math told them that it would cost, with a conservative estimate, 50 times the amount of the raise to replace me.

Think they could have dug a little deeper into those pockets for a raise that would have made me feel valued and appreciated and still have made a good business decision for the organization given the cost to lose/replace me? Of course they could have.

Time to change the conversation

So, it’s time to start taking the costs of employee turnover into consideration. When you factor in those costs, it changes the conversation about how the organization approaches compensation, benefits, training, development, engagement, and morale.

It can be expensive to invest in these things without a direct line to return, but it costs significantly more to lose your best employees when they jump ship for a few thousand more dollars over the course of the year.

This was originally published on Zen Workplace.

Karlyn Borysenko is the Owner and Principal of Zen Workplace , a consultancy dedicated to fixing the “people problems” to help individuals achieve professional happiness and success, and organizations to drive productivity and results. She’s an MBA, is a dissertation away from completing her PhD in Organizational Psychology, and is a certified DiSC trainer. You can connect with Karlyn on Twitter at @KarlynMB.

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25 Comments on “What Was Management Thinking? The High Cost of Employee Turnover

  1. You have HR people who have no idea what scientists do making these absurd decisions. Then you have bean counters who don’t know these numbers.

    In your case, a “spot bonus” of say $20K would have been appropriate. It does not raise your annual pay. It’s just a way of saying “great job” and thanks. You would have felt that and would have been happy. The company still would have saved a ton.

      1. But regardless of the reason, what this information exposes is a fundamental lack of understanding about what turnover really costs an organization. When you consider all of the costs associated with employee turnover – including interviewing, hiring, training, reduced productivity, lost opportunity costs, etc – here’s what it really costs an organization:

      2. But regardless of the reason, what this information exposes is a fundamental lack of understanding about what turnover really costs an organization. When you consider all of the costs associated with employee turnover – including interviewing, hiring, training, reduced productivity, lost opportunity costs, etc – here’s what it really costs an organization:

    1. Part of H/R’s problems are they rely too much on each other. I work in the hotel business and I have confronted H/R managers that claim they research pay. All they do is call and ask other hotels what they are paying.

      Yet I can hand my friend a fake resume and he’ll come back with a job offer that is $10,000 more than my H/R assures me is possible. Why? Because H/R isn’t doing their job. They just call a friend at a hotel and ask what they are paying. The other hotels lies, as I’ve proven time and time again, by showing our H/R job offers substantially higher than what they get when they “phone their friend in H/R.”

  2. The issue is not just about money. It is about stability and trust. A big raise doesn’t mean anything if three months into the year the CEO decides he needs a bigger yacht and you get caught in the layoff. Unfortunately, too many corporations only think about “increasing shareholder value” at the expense of employees and often even customers (Comcast, I’m looking at you!). So long as corporations place the monetary gains of shareholders before the employees that do the work, you are going to have your best jumping ship because being the best doesn’t mean anything when the CEO needs to drive up the stock price by another .15 percent.

    1. To be fair, this is an issue that is legit. In the old days, corporations were actually part of the work force. Palley ran CBS but he WAS CBS. His company was about TV broadcasting or somehow related industries such as records.

      Now a company is owned by a group of investors who lump said company with a dozen other companies, none which is related in any way, close or distant. If a sector of that doesn’t measure up it is sold off very quickly.

  3. Great points made. I’ve shared with one of our executives, who is still entrenched in the “promotional increases must never exceed 5%” mindset.

  4. Trouble is, there are not many jobs out there to go to and employers know that. They can turn up the burners as high as they want. Very few are going to walk out. In my office, if a competitor were to open up similar positions down the street, that place would empty out in a heart beat, but the chances of that happening are pretty much nil.

    1. I disagree. Yes, jobs are harder to get now but it’s mostly back to normal. And this same phenomena occurred during the 90s, when I couldn’t even replace my workers as unemployment was so low.

    2. That was the case when the market collapsed, business is booming and employee turnover is very high, especially with younger employees.

      Everyone’s Boomers are retiring and garbage pay/rewards won’t keep your younger workforce around when they can jump ship for a lot more pay.

  5. This is so true, I never really understood, why employers take leaving a company so personal. Even when it’s NOT their company. I went to H/R and pointed out, that after one year, I was now doing two additional jobs. The Reservations manager quit and the PBX manager quit, so I took their jobs over at no salary increase.

    The H/R manager stated she could not increase my salary as I was doing the job without any pay now. My boss said, I should go get “firm” offers and come back to the company so she’d have some leverage to ask for a raise.

    I walked down the street and the first hotel I went to offered me $7/hr more. I went back and resigned.

    They wound up no only hiring two more people but having to pay more than I got at my new job to replace me there. So what the ??? T

    And I’ve seen this repeated time and again, companies won’t pay more, so the good employees leave and the bad one, who can’t get more stay.

  6. How true this is. Very informative and well written. Investment in human capital is more important than ever! Here is a calculator for managers to plug in their own company’s numbers to get a true cost as it relates to their business. I enjoy your articles,
    http://myemployees.com/calculator/

  7. Yes, its high time organizations start looking at cost of employee turnover very seriously. One of the ways is to engage with your current employees pro-actively and build a work-environment to maximize their productivity and motivate them to stay with you longer. This could be achieved by having right analytics in place. Its important to integrate employee engagement with Big data analytics. To know more Read @ http://goo.gl/s46pVm

  8. The “cost of inflation” number is a joke as well. In reality, most families are experiencing a higher than 2% inflation rate based on the proportion of their budget that is going towards housing/property taxes, education/college, food, etc. The consumer price index is not a realistic measure for average families.

  9. Can you please share your source for ”
    For entry-level employees, it costs between 30-50 percent of their annual salary to replace them.
    For mid-level employees, it costs upwards of 150 percent of their annual salary to replace them.
    For high-level or highly specialized employees, you’re looking at 400 percent of their annual salary.”?

  10. Hi Karlyn

    Can you please share your source for
    “For entry-level employees, it costs between 30-50 percent of their annual salary to replace them.
    For mid-level employees, it costs upwards of 150 percent of their annual salary to replace them.
    For high-level or highly specialized employees, you’re looking at 400 percent of their annual salary.”?

    1. I would like to second this comment. This is a great article, but the source you link to just before this segment lists turnover by salary (i.e under $50,000 is 21%). There is no source that discusses 30-50% or 400% — and this would make a big difference in the calculations (it would still be costly to replace employees, but less so)

  11. I would say that the issue isn’t due to antiquated HR tactics, but due to organizational leaders who will not translate their profits into employee increases.

  12. If the employee turnover rate is above 5%, it may be a problem and if it is above 10%, it is problem. Involuntary turnover should be 0% or close to 0%. A well managed employer should see higher voluntary turnover when employees must leave to progress in their careers but that just makes room for other employees to progress in their careers.

    If a 600 employee company replaces 15% of their employees per year with an average salary of $20,000 per year, then the cost of replacing employees is $1.8 million, see other examples below.
    600 ee x 15% x $20,000/year x 1.00 = $1,800,000 = $1.8 million
    600 ee x 15% x $30,000/year x 1.25 = $3,375,000 = $3.4 million
    600 ee x 15% x $50,000/year x 1.50 = $6,750,000 = $6.8 million
    600 ee x 15% x $100,000/year x 2.00 = $9,000,000 = $18.0 million

    You may change the number of employees (600), the turnover rate (15%) and the annual salary ($20K, $30K, $50K, $100K) but use the closest multiplier (1.00, 1.25, 1.50, 2.00).

    Employee turnover is very expensive, bad for morale, and time consuming for the hiring managers.

    The solution to excessive employee turnover is not expensive, good for morale, and not time consuming for managers.

    Example of the cost of turnover in a financial services firm.

    The firm was replacing 200 customer service reps a year with an average annual salary of $48,000. After doing the data entry into the Bliss-Gately Tool, an Excel workbook, did the calculations. They were able to show that the full cost of that employee turnover was about $72,000 per employee, or $14.4 million per year. They were flabbergasted. That’s a big number even for a 2,500 employee company. By the way, their Cost-To-Hire was less than $10,000 per employee.

    I created the Bliss-Gately Tool, an Excel workbook, in the late 1990s because I could not find a method that was anything but rudimentary. Bill Bliss’ article Cost of Turnover was the most complete list of items that went into the cost of turnover but it was all words, no calculations. With Bill’s words and my Excel skills and Dr. John Sullivan’s critique we created the Excel workbook so that employers would know their cost of turnover.

    When we apply the tool to valued executive personnel, for example, the results can get really striking. The reason is that key personnel have roles where things like relationships, institutional knowledge and talent for the job can have considerable value. We’re dealing with situations where a question like, “What would it cost us if Mark or Sally were hit by a bus?” elicits worried looks and responses like “I have no idea. Boy that would be a real problem.”

    Analyze those types of situations carefully, and you’ll find Cost-To-Replace can run into the millions. We know of one situation where an executive team calculated the replacement cost of a particular key person at $50 million. After learning this, the CEO wrote him a bonus check for $6 million. Do you think any recruiter can make him an offer he can’t refuse?

  13. Many companies spend unnecesary dollars on turnover. When you look at why employees leave (i.e., more money, bad management, poor work environment, etc) and how simple it is to correct the issues employees have with companies, you realize companies are poor HR decisions.

  14. Hi, I would be really interested to understand how you came up with the 400% of salary cost to a business of an incumbent senior leader leaving. Can you share that with me?

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