Employee turnover is expensive. As I wrote in a recent post, it is costing American companies at least $20 billion every year.
And although it's hard to believe, that cost is just what's reported. The real number could be closer to $25 billion if you factor in lawsuits, lower productivity and recruiting costs.
What may be even harder to believe is how many executives I meet who have no idea how much their employee turnover is costing them.
Do you know how much one lost employee is costing you? If you're like most organizations, it's a lot more expensive than you realize.
We were talking with an executive of a medium sized brand management company in the Northeast. They had contacted us to discuss their Millennial turnover—which had gone up significantly in the last year.
As we were discussing what had changed within the organization, this executive interrupted and said, “It’s just so frustrating. We hire these kids and then they leave a year later. We are either going to stop hiring young people to work here or lower the salary of everyone new coming in.”
Neither option sounded like a good idea if the organization was going to keep growing. First, not hiring young talent is not only age-discrimination, it also hamstrings your company’s growth as your older tier of employees retire. Second, lowering salaries deters good talent from joining your team and discourages your current employees- no matter their age.
As we started discussing how the organization can practically cut their turnover and increase overall engagement, the executive interrupted again and stated, “What’s this going to cost me?”
What are my choices here?
We laughed a bit and replied, “It will cost you, but nothing close to what it’s already costing you to lose your employees at the rate you are now.”
We have worked with top executives from brands around the world long enough to know this question will come up eventually.
And the good news is that we can actually calculate the cost versus investment right in front of them.
The equation to determine the cost of one lost employee to your organization is simple:
1.5 x Their Salary = Cost To Your Company
The Society For Human Resource Management (SHRM) has determined that the average cost for employee turnover is around 150% per employee who leaves. This percentage includes:
But here’s what this equation does not include.
And although this equation is helpful to get a baseline for turnover costs, it actually doesn't reflect the real price tag of attrition.
The fatigue of hiring, losing, replacing and training employees has two costs. The hard cost is the monetary cost which most organizations can quote off of a spreadsheet. The second cost actually is more expensive. It is the other costs associated with losing talent.
What this doesn’t include, however, is the really expensive side of hiring: lawsuits. The 150% equation does not factor in potential lawsuit for dismissal, wrong termination, discrimination... and the list goes on. Depending on the industry that you are in, the lawsuit likelihood could by sky-high. Know your risks before dismissing someone or allowing them to get to the point where they quit under bitter circumstances.
It doesn’t factor in some of the invisible costs that can be just as lethal and lead to additional turnover. These include the lack of productivity of the team with a new member and the overall morale of a company that sees, hears and feels every time a new hire leaves.
It includes the morale of the organization, the trust in corporate leadership, confidence in the company’s future, and a loss of productivity of others on the team not directly tied to the loss of one single employee.
It can take up to 6 months to properly onboard and train a new hire so that they are proficient. In those 6 months, the individual is making mistakes, learning the ropes and getting their rhythm. But they are also costing the company major profit.
Let’s see how this plays out. Jim just got hired to work in the sales division at Acme Company. Jim is an experienced sales rep with over 10 years of selling products. His first week is spent pouring over product catalogs and listening to recorded sales calls of the highest performing and lowest performing sales reps.
Jim then shadows a sales rep for the next four weeks, attending business luncheons and client presentations to pick up the nuances of the job.
Halfway through his second month, Jim is feeling confident that he can find and close clients on his own. By month three, Jim is now leading sales calls and meetings with clients while being shadowed by his manager to ensure quality control and answer any questions Jim may not know the answer to yet.
It’s now month four and Jim has been recommended by his manager to their supervisor to begin to run on his own. After a few more assessments by his supervisor, Jim is now a full-fledged member of the sales team.
So how much did that cost? In Jim’s first four months he made two sales on his own and was a part of closing six sales. The sales he brought in totaled $20,000 while the sales that he observed during his training totaled $120,000. His manager typically closes 10 sales a month, but was only able to close 6 sales in the last four because he was observing and training Jim.
4. Cost of Acquisition
The equation that SHRM provided is just an average. That means that if this person is in a higher paid position, has more influence or was more expensive to acquire, the cost may be as high as 200%-250%. Did you use a recruiting firm? Was there an executive search involved? Depending on how much time, research and capital that was outlaid to find the employee, the price tag could be much much higher.
5. Leadership Distraction
Every time that you bring on a new hire, that new manager takes 25 hours (on average) out of their first two months helping them get up to speed. That’s 25 hours they aren’t doing their job, serving their clients or managing the other team members. That could mean costly mistakes and frustrated employees.
Employees are your greatest asset. Whether you have three people or 3,000, hiring and firing is expensive. When done right, it can be the best investment you ever make. When done poorly, it can be the death of your organization and a threat to your industry.