Employee turnover costs: What you’re really losing and why

Turnover. Churn. Poor employee retention. They’re terms that keep company leaders up at night, and for good reason. 

Among other consequences, having a revolving door workplace can cost you thousands of dollars each year.

Here’s how to calculate your current turnover cost and why the real impact is more than monetary.

What is employee turnover?

Turnover occurs when an employee exits an organization and another replaces them. There are two key types: voluntary turnover and involuntary turnover.

Voluntary turnover is when someone chooses to leave the company. It can include quitting for a better job, taking a career break to study, or retiring. 

Involuntary turnover occurs when an employer decides to terminate an employment contract. This might be a firing, a layoff, or choosing not to extend a contract after a probationary period.

Both types of separation figure into total turnover numbers. But by tracking each separately, leaders can get a clearer picture of why turnover is happening.

What is the cost of employee turnover?

Research from the Work Institute states that replacing an employee costs roughly 33% of their base pay. That’s thousands of dollars lost with every exit, without considering any lost productivity or engagement.

It’s far less expensive to keep the talent you have than to replace it. Here’s more on how the costs of staff turnover add up.

Hard costs

Hard costs are concrete, calculable expenses, like those associated with products and services. Every time a company loses an employee and must replace them, it has to invest in the following.

Offboarding costs 

Offboarding costs include final paychecks and severance pay. Companies may also have to liquidate unused paid time off (PTO). If you’ve outsourced the offboarding process to lawyers or an employee termination service, expect additional fees there, too. 

Hiring costs 

When an employee leaves, there’s often an empty role to fill, and hiring isn’t cheap. Advertisement costs and time spent assessing candidates can really add up. Every time HR or a manager has to conduct an interview, that’s hours lost from their day. A third-party recruitment service can expedite the hiring process but comes with extra fees. 

Onboarding costs 

Onboarding costs are expenditures required to prepare a new employee for their role. This might include training, equipment, or software.

Even with in-house HR and recruitment teams, the hiring and offboarding processes aren’t “free.” They take up salaried employees’ time that could be spent on other tasks. 

Soft costs

Soft costs are intangible losses that companies can’t easily quantify. Even though it’s tough to put a number on these concepts, they drain resources and negatively impact operations. Here are a few to consider in your employee turnover cost calculations.

Lower employee morale and increased stress

There’s often a lag between an employee’s exit and their role being filled. All that extra work has to go somewhere, so already busy teams are landed with a pile of additional tasks. Unexpectedly having to take on added duties can increase stress and really dampen morale.

Lost productivity and quality

In high-turnover situations, companies may face several unfilled roles at once. At times like this, it’s impossible for the remaining workforce to pick up the slack. Productivity drops and quality slips. In the worst cases, people might even have to attempt to take over work they’re not trained for: a real recipe for disaster.

Lost knowledge

When employees leave, their training and experience go with them. Any knowledge of workflows, team goals, and how to operate equipment and technology is lost. If they’re client-facing, these relationships can also suffer, as a whole new connection needs to be built. 

Much of this lost knowledge is based on experience and can’t easily be taught. Training can only go so far to offset it. 

Lower customer satisfaction

Companies with high turnover might struggle to keep up with work. Burnt-out and overtasked employees perform poorly, impacting product and service quality. Client relationships might suffer, since there’s not enough capacity to quickly respond to their requests.

Weakened employer brand

High employee turnover harms a company’s brand. New talent may think twice about working for an organization that’s shedding employees. Stakeholders and consumers may also begin to question the operation’s ethics and effectiveness. 

The wrong hires

When you’re eager to fill a position, it can lead to a less-than-ideal candidate landing the role. Inadequate hires set off a domino effect of losses across the organization. Their poor decisions cost the company money, other teams have to work harder to pick up the slack, and morale plummets.

The hire themselves might notice that they’re the wrong fit, meaning they’re quick to leave or look for another position. Your turnover stats then rise even higher, and the expensive process of filling the role begins again.

How to calculate the cost of employee turnover

The cost to replace an employee is high, so it’s wise to avoid churn if possible. Employee turnover tracking shows how much of a workforce has left over a defined period. It allows you to spot spikes in turnover, so you know when to investigate further. 

Follow these steps to work out your annual cost of turnover calculation:

• Step 1: Throughout the year, average out the costs related to offboarding, hiring, and onboarding each employee. Remember to also consider any indirect fees associated with production drop-offs.
• Step 2: Determine the company’s turnover rate, using the following formula: Turnover rate = [(# of employee separations) / (Average # of employees)] x 100. For example, if 10 employees left in a year and the organization maintained an average number of 200 employees, turnover would be 5%.
• Step 3: Multiply your company’s turnover costs by the turnover rate, and then by the average number of employees. If we say that average offboarding, hiring, and offboard costs come to $5,000, then the formula for the current example would be: 5,000 x 0.05 x 200, resulting in a total annual employee turnover cost of $30,000. 

6 benefits of having a low employee turnover rate

The math doesn’t lie: Retaining your company’s talent will save you money. But beyond the cash benefits, here are six more convincing reasons to avoid high turnover.

Higher employee productivity

Teaching a constant stream of new faces how a role works is disruptive to workflows. When teams are well-established, they can focus on performing at their best, rather than navigating new working relationships. 

Stronger institutional knowledge

Maintaining your workforce means knowledge doesn’t walk out the door. Incentivize your most valuable staff to stay by regularly increasing pay, providing benefits, and offering career advancement opportunities. 

Robust employee benefits packages can work for you, too. By offering further education funding, your workforce becomes more skilled while being appreciative of your support.

Reduced burnout for remaining staff

High turnover overburdens the remaining workforce with extra work. This invariably leads to burnout, harming productivity even further. When you have a full roster of employees, teams can work like a well-oiled machine.

Better team morale and engagement

No one wants to lose a beloved coworker or take on excess work. Keep morale and engagement high by preventing turnover at its root. Use Workleap Officevibe to survey employees on their experience and proactively improve flaws in the company culture. Building a better work environment will encourage employees to stick around.

More consistent company culture

Every time a workplace experiences an upheaval thanks to turnover, a new teammate has to be brought in. That’s another change to company culture and another person who needs to adapt to a new environment. 

Maintaining the same workforce for a long period of time means a more consistent company culture. Colleagues have better relationships, communication improves, and the company enjoys better unity.

A return on investment

Investments in employee retention help avoid the negative consequences of turnover, like dips in production and sales. And according to the McKinsey Health Institute, retention strategies such as building a strong employee value proposition don’t just reduce turnover: they help businesses attract the best talent. 

Stop employee turnover before it starts with Workleap

High employee turnover is costly, plain and simple. Whether it’s job advertisement costs, dips in productivity, or the loss of knowledge, a constant stream of people leaving is bad for business.

With Workleap Officevibe, you can survey employees on their experience to gain insights into what they want at work. Analyze results using the platform's AI-driven insights and recommendations to build a retention strategy that keeps employees happy and engaged.