Industry-leading organizations prioritize employee retention. They understand the importance of keeping their top performers. There are direct and indirect costs of losing an employee.
As a leading recruitment agency, we work with companies to replace employees all the time. We know the importance of not only hiring the best people but also keeping them.
Employee turnover can significantly impact your organization, especially if you are losing your top performers. How much so? It’s estimated that it can cost between 30% and 50% of an employee’s salary. So, we’re talking thousands of dollars.
In this blog, we’ll discuss:
- The two main ways you can lose an employee
- The 7 direct costs of employee turnover
- The 10 indirect costs of employee turnover
What Are the Two Main Ways You Can Lose an Employee?
People exit a company in one of two ways – they quit or they are let go. Either way, companies incur the of replacing the lost employee. You can lose people in two ways:
- Voluntary or dysfunctional turnover: When a skilled and well-performing employee exits the company and takes another job. The loss of this person negatively impacts the company – loss of skills, knowledge, and expertise.
- Involuntary turnover: When the company initiates the release of an employee because of performance or other issues. You also lose productivity and place strain on other employees to pick up the slack until you find a replacement.
There are direct and indirect costs associated with each type of turnover, but dysfunctional turnover can have a bigger impact on your company. There are costs incurred not only with finding a replacement, but also the impact of turnover on morale, culture, and how it affects your customers. Companies often don’t see dysfunctional turnover coming and have less time to prepare for it.
Losing top performers can be expensive and demoralizing. Here are the direct costs of dysfunctional turnover:
What Are The Direct Costs of Employee Turnover? Here are 7 to Consider
The direct costs of employee turnover are easier to account for. You can figure out a dollar value for the amount of time and resources you use to replace an existing employee. Here are the main direct costs:
- Recruiting a replacement: There is always a cost to hiring new people. Recruitment and background check fees and the amount of time others in your company spend on the process. This includes pre-employment assessments and conducting the interview process.
- Advertising: You will need to spend money to put up your job ads online. Marketing, paid ads, and other advertising costs add up.
- Onboarding: Providing access to onboarding documentation, new employee equipment, paperwork, and benefits packages, and providing access to company resources.
- Time to interview and assess candidates: The number of hours your people spend reviewing resumes, preparing for and conducting interviews, and choosing a replacement.
- Time to train new employees: Once you hire a new employee, you’ll need to invest time in training and coaching them on the job. The number of hours spent doing this can add up quickly.
- Separation costs: There are certain costs associated with processing an exiting employee. There is sewerage pay, benefits payouts, potential legal fees and the cost to perform exit interviews.
- Overtime and temporary staffing: Depending on the type of job, you may need to pay overtime for your existing employees to cover shifts and workload. You may also need to hire a temporary worker to cover the role while you are recruiting.
Companies often account for the direct costs of losing an employee. But, it’s the indirect costs that can often catch companies off guard.
What Are the Indirect Costs of Employee Turnover? 10 Things that Could Put You in the Red
The indirect costs of losing an employee are more challenging to track, but they can have just as much of an impact on your company. The top indirect costs are:
- Knowledge loss: With every employee you lose, a certain amount of important knowledge and expertise walks out the door with them. This can be more impactful than you realize, especially if the employer is in a high-level position.
- Productivity dip: Expect an exiting employee’s production to dip once they’ve made their decision to leave. There will also be a loss of production as the replacement employee ramps up in the role. There could also be reduced efficiency when employees are covering the workload until a replacement is found.
- Trade secrets: Your loss can be another company’s gain. Expert insider knowledge can be passed on to your competitors if they hire your ex-employees.
- Lost motivation: It can be challenging for your current employees to stay motivated with so much movement happening in your company.
- Morale: If turnover is high in your company, morale can suffer. People can feel like they are “on a sinking ship.” A lot of pressure is often put on those who stay and have to pick up the slack. This can lead to increased stress and burnout for the remaining staff.
- Decreased customer satisfaction: There is the potential to have decreased customer satisfaction due to longer wait times or lower-quality service. There could also be a loss of customer loyalty and trust, leading to a potential negative impact on brand reputation
- Recruitment and Onboarding Challenges: If you have difficulty finding a suitable replacement it could lead to a longer hiring process and increase recruitment costs.
- A Strain on Managerial and Administrative Time: Managers and HR teams often spend considerable time on tasks associated with turnover, such as conducting exit interviews, hiring replacements, onboarding new staff, and adjusting workloads. This time could otherwise be dedicated to strategic initiatives or productivity-related activities.
- Training and Development Loss: When a trained employee leaves, the organization essentially loses the investment made in their development. While training costs are direct, the time and effort spent on their career progression within the organization are sunk costs that are challenging to quantify. It can also force managers to put some training programs on hold until they find a new employee.
- Reduced Innovation and Problem-Solving Capacity: Turnover disrupts team dynamics and can slow down innovation. When experienced employees leave, it may take time for new team members to understand workflows, reducing the organization’s overall adaptability and problem-solving capacity.
Reducing turnover through improved retention efforts can mitigate these direct and indirect costs, which often accumulate and become substantial over time.
Read More About Employee Turnover
What Is the Financial Cost of Employee Turnover?
Watch: 4 Crucial Ways to Reduce Employee Turnover
Why Do People Quit? Report Suggests 3 Key Factors Predict Employee Turnover
Are You Prioritizing Retention? 5 Ways to Retain Top Executive Talent
