The True Costs of Employee Turnover
From Apple’s revolutionary smartphone to Ford reinventing the automobile, human brilliance and dedication is the only way companies accomplish amazing things.
That’s why struggling to retain talented people can be such a drain on an organization’s potential. We know turnover is expensive, but its costs aren’t just financial — they manifest as lost productivity, lowered innovation, weakened team bonds, and reduced agility.
As of 2019, US companies were losing a staggering trillion dollars a year to turnover. Worse yet, that figure may not even capture the true cost of replacing qualified employees.
And turnover has only increased with the labor market disruption of the last three years. Moving forward, Gartner has recommended that companies prepare for 50-75% higher turnover than pre-pandemic levels, and estimated that roles are taking 18% longer to fill.
Direct and indirect costs of turnover
HR professionals already know how costly turnover can be. As a rule of thumb, it costs 33% of a person’s annual salary to find, hire, and train their replacement.
But many talent experts don’t feel that figure even comes close to approximating what turnover really costs companies. According to the Society for Human Resources Management (SHRM), turnover costs can be triple or even quadruple the departing employee’s salary, especially if they were in a highly specialized or senior role.
There’s a lot more effort — and money — involved in finding great talent than the immediately obvious ‘direct costs’ we will break down below. HR expert Edie Goldberg shared with SHRM that these expenses often account for less than half of the true cost of turnover. As much as 60-70% is hidden, or ‘indirect costs,’ which have far-reaching implications at many levels of an organization.
Direct turnover costs
Direct turnover costs are related to finding, hiring, and training a new employee, as well as overseeing the exit process, or ‘offboarding,’ of the person leaving. Direct costs can be monetary, but they can also take the form of staff time or other resources.
- Recruitment and hiring
- Posting job ads
- Working with recruiters
- Time spent evaluating applications
- Time spent interviewing candidates
- Onboarding and training
- Orientation session
- Time invested in training
- Lower productivity during training
- Training resources and materials
- Exit interview
- Lower productivity during exit period
Indirect turnover costs
Indirect costs are related to these same processes. But they’re harder to quantify, affect more people within an organization, and can potentially have longer-lasting effects.
Loss of institutional knowledge and expertise
The departing employee’s knowledge and skills, such as special processes they relied on, might not be adequately captured elsewhere in the organization. Or, other people might not have realized the impact they had.
Damage to team morale and engagement
Especially on small or close-knit teams, it can take a long time for remaining employees to get comfortable with a new person and reach the same level of agility and collaboration they had before.
Leadership and management time investment
Especially if the role being filled is pivotal or senior, upper management and leadership is probably assisting with the process, and maybe even attending multiple rounds of interviews. That commitment of time and resources can divert attention away from other important goals.
Strategies for reducing regrettable turnover
The best way to reduce turnover costs isn’t to make hiring cheaper — it’s to make fewer people want to leave in the first place. Fortunately, most factors that can make a workplace more attractive are, to some degree, within an employers’ sphere of control.
According to recent research from Qualitrix, the top factors driving North American employees’ intent to stay with their current employer are:
- The perceived ability to meet their career goals
- The organization’s alignment with their values
- Fair compensation
- Benefits that meet their needs
- Seeing a bright future for the organization
Here are some strategies organizations can use to lower their turnover, boost retention, and hang on to their best people.
Invest in onboarding
Too often, onboarding is all about the company — educating the new hire, and providing them with the tools they’ll need to perform well.
While that’s certainly important, research has shown that a more personalized, employee-centric onboarding model will boost retention, making new hires as much as 32% less likely to quit.
No one likes feeling like a cog in the machine. Radical transparency and open communication helps people feel more connected to each other, to their company, and to the greater goals they’re working towards.
Pay transparency is one major trend for 2023, but it goes much farther than that. Use OKRs to connect people’s work to company-wide initiatives, and use regular 1-1s and check-in not just to manage performance, but to anticipate burnout and measure morale.
We know people want flexible working. But that can mean different things to different people, and not everyone wants the same kind of flexibility!
Don’t make assumptions — talk to employees, and ask what kind of flexibility they actually want. For example, someone might value location flexibility so they can pursue their travel goals. But a busy parent might prefer time autonomy, so they can work around their child’s school and extracurricular schedule.
Feedback, feedback, feedback
There’s only one way to make sure employees are happy and satisfied — talk to them, and see how they’re doing!
Use employee feedback loops to elevate how you check in with employees and show them you take their concerns seriously. The basic feedback loop model is to gather information from employees, critically analyze it, take action, and notify people you’ve done so.
Also consider moving beyond the exit interview. Proactively connect with employees who are considering leaving, or who you suspect are. Be direct — what do they need? What will it take to get them to stay?
Proactively prevent burnout
Don’t wait until people are already burnt out to take action. Instead, follow these seven steps to prevent overwhelm and burnout.
They include watching for signs of burnout, offering flexibility when needed, helping people de-prioritize and delegate less important tasks, and emphasizing mental health and wellbeing as a core value.
If someone never said ‘thank you,’ why would you want to keep helping them? That’s the common-sense idea behind employee recognition — but to truly improve performance, it must be done right.
Great employee recognition is personal, genuine, situationally appropriate, and well-integrated into regular workflows.
Strong relationships reduce turnover
The common denominator between many of the above strategies? Clear communication, high workplace trust, and strong professional relationships.
When people have a chance to communicate their needs — and see that their employer wants to meet them — it paints a picture of a brighter future, both for themselves and for their organization.
But for managers, staying in communication with dozens of reports and translating those chats into action can feel like an overwhelming task. That’s the idea behind 15Five’s platform, which gives managers a central space to monitor, organize, and take action on their peoples’ performance and engagement.