The true cost of employee turnover in 2024

Employee turnover is very costly for companies. Analytics and advisory company Gallup estimates that employee turnover costs U. S. businesses a trillion dollars every year. That is because the cost of replacing an employee can be as high as two times the employee's annual earnings.

There are many different factors that go into the cost of employee turnover, many of them being indirect costs that are hard to estimate on a spreadsheet. What is the true cost of employee turnover? How to calculate employee turnover cost? What strategies can help businesses reduce their turnover costs?

Employee turnover indicates how many employees leave a company over a specific period of time. The total number of departing employees includes both voluntary termination of employment and employment termination due to redundancy, layoffs, gross misconduct, or other.

The problem with employee turnover is that it costs businesses a lot of money. The cost of employee turnover not only includes direct costs, such as the costs associated with hiring a replacement, but also indirect costs, such as a drop in productivity following the employee’s departure.

Reasons behind voluntary employee turnover include:

• Perceived work-life imbalance,

• Desire to change career,

• Relocation,

• Supervisor issues,

• Compensation,

• Lack of recognition,

• One-way communication in the workplace,

• Limited skills development opportunities, and

• Toxic company culture.

The average cost of employee turnover is estimated to lie between one-half and two times the departing employee’s annual salary. The reason why turnover costs businesses so much money is that there are not only the hard costs of losing an employee that need to be taken into consideration. Instead, businesses also need to look at various soft costs.

The hard costs associated with employee turnover equal the hiring costs the business incurs for filling the vacant position. According to data from SHRM, the average cost of hiring a new employee reaches almost USD 4,700. However, there are cases where the total cost of filling an open position can be as high as three or four times the new hire’s salary.

When calculating the cost of employee turnover, businesses need to take different aspects into account. This includes direct and indirect cost factors. Based on these cost factors, every business will end up with its own distinct formula for calculating the turnover cost per employee.

Here is an overview of what goes into the direct costs of employee turnover:

• Spendings for advertising the open position,

• Time commitment from the HR team for recruiting, onboarding, and training new employees,

• Time commitment from departmental leaders and managers for supporting the HR team during the hiring process,

• Costs for running background checks on potential candidates,

• Recruitment agency fees,

• Costs for organizing a candidate assessment center,

• And more.

Indirect costs of employee turnover include:

• Productivity drop: It will take time for the new hire to reach the same productivity and efficiency levels as the old employee.

• Repercussions on employee morale: Seeing one of their colleagues leave is likely to have a negative impact on the morale of the other team members. This, in turn, can weigh down on their productivity at work.

• Knowledge loss: Employees who have a long tenure with a company typically have accumulated extensive knowledge about the business, the customers, the processes, and much more. Without good documentation, the majority of this knowledge will leave the organization along with the employee.

• Reputational damage: Being known as a high-turnover organization can severely damage a business's employer brand. To make up for a bad employer reputation, businesses need to spend more money on attracting new candidates, which will increase the cost per hire in the long run.

• Increased risk of successive turnover: Voluntary employee turnover is often like a game of dominoes. As soon as one employee decides to quit, many more could follow suit. This results in a much higher turnover rate and, successively, higher employee turnover costs.

• Overtime: At least some tasks will need to be picked up by other teammates when an employee leaves. More work often results in more hours, which means that the business might need to pay overtime rates to the remaining employees.

• Missed revenue: Depending on the employee’s position, the time it takes to find a suitable replacement could mean that the business loses out on a lucrative deal or opportunity for generating revenue.

• Potential loss of long-standing customers: When employees in customer-facing positions leave the company, this could lead to customers doing the same because they are afraid of not getting the same level of service as before.

The most effective strategy for reducing employee turnover costs is to improve employee retention. There are many different approaches to retaining your best employees. Here are a few suggestions that will help you lower the cost of employee turnover in your organization.

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Ask the right questions during the exit interview

Asking the right questions during the exit interview can reveal a lot about the reasons why employees leave your company. The insights you gain from the interviews can help you retain your best talent and prevent them from leaving for the same reasons as their peers. Questions to ask during an employee exit interview should include:

• What was the employee’s overall experience at the company?

• What aspects of the work culture did leave a positive/negative impression?

• What was the main reason for leaving the company?

• What are their future professional goals and aspirations?

• What did they find most attractive in their new employer?

Work on your employer brand

An authentic employer brand that truly reflects your corporate culture and is in line with how you value and support your employees can go a long way towards retaining your best workers. It’s not just about how you present your company as a potential employer to the rest of the world, but also about increasing employee loyalty by showing them that what you promise as an employer is really true.

A strong employer brand will give existing employees a better understanding of why they are important to the company.

Enhance your onboarding process

The key to successful employee retention is a positive employee experience that persists all the way through the employee lifecycle. Among all the different phases of the employee lifecycle, the onboarding process is particularly important with regard to employee retention.

The onboarding phase is the perfect occasion for a company to lay the foundations for a strong employer-employee relationship. Also, the first impression is typically the one that lasts. Organizations looking to reduce their employee turnover cost should therefore start by optimizing their onboarding process.

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Create exciting career development opportunities

Employees want career development opportunities, and giving employees what they want is likely to convince them to stick around. One way of minimizing employee turnover costs therefore consists in offering employees a broad range of opportunities for developing their professional skills and advancing in their career.

This includes creating a varied Learning & Development (L&D) program employees can enroll in and increasing internal mobility. Offering employees the chance to grow in the company also benefits the organization because it will ensure that future talent needs are met and that succession planning is covered.

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Establish a positive company culture

Creating a positive work culture that makes employees feel appreciated for what they do can be a major contributor towards cutting turnover costs. Here are a few tips on how to do this:

• Choose core values that define what your company stands for.

• Communicate and manage expectations clearly at all times.

• Set clear, achievable goals and celebrate achievements with the team.

• Promote diversity and inclusion in the organization. 

• Establish employee recognition practices.

Enhance your benefits and compensation offerings

Benefits and compensation play a crucial role in retaining top performers. In fact, 78% of employees say they would stay with an organization because they like the benefits. What this means is that it’s not just about offering employees sky-high salaries, but really about creating an attractive perks and benefits package that responds to employee needs and offers some personalized options employees can choose from.

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