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How to Calculate Employee Turnover and The Cost of Hiring

Bringing on new employees isn’t as affordable or easy as it used to be. The days where an employer could post a job role online, and watch a stream of high-quality applications come in automatically are gone. Thanks to the surge of online job boards, and employer review sites like Glassdoor, and record-low unemployment rates, […]

Written By Sarah Mooney

On May 5, 2020

Dedicated wellness expertise each step of the way.

Bringing on new employees isn’t as affordable or easy as it used to be. The days where an employer could post a job role online, and watch a stream of high-quality applications come in automatically are gone. Thanks to the surge of online job boards, and employer review sites like Glassdoor, and record-low unemployment rates, the market for talented hires is more competitive than ever. However, what’s even harder is trying to retain top talent and reduce employee turnover

There’s no hiding the fact that employee turnover is extremely expensive, and very time-consuming. Many employers understand this, however, many still underestimate the value of reducing employee turnover and fail to approach the challenge – or even attempt to.

How much is the cost of employee turnover?

The cost to replace an employee ranges from six to nine months of that position’s salary, as stated by the Society for Human Resource Management (SHRM). This means that it could cost anywhere from $17,500 to $26,250 to replace an employee earning an annual salary of $35,000. These hiring costs may seem very high at first glance but the truth is that many experts find these estimates to be very conservative.

It’s important to understand both the direct and hidden costs involved:

Direct costs are costs associated with turnover:

  1. Separation costs: Severance pay and administration costs for when an employee leaves.
  2. Hiring costs: Job board advertising costs, ATS software, and recruiter fees can quickly add up. Especially, when your company has a high turnover rate. 
  3. Onboarding costs: Administration costs, and orientation/ training costs. Mentorships can even be calculated into the cost of turnover. 
  4. Cost of unfilled positions: The SHRM’s 2017 Talent Acquisition Benchmarking Report determined that the average time it takes to fill a role you’re hiring for is 36 days. For these 36 days, employers must find ways, such as bringing in temporary workers or paying overtime hours, to cover unfilled positions.
  5. Reduced productivity: It’s safe to estimate that a new employee won’t work up to their full potential until the employee understands their job duties, and knows how to perform them. Several new hires could reduce productivity to a point where it affects the company’s bottom line. 

Not only is employee turnover clearly expensive, but when an employee leaves the company – they’re leaving with all the skills/ knowledge they gained on the job. It’s important to acknowledge that a lot of money was spent to bring them to the level of skills they were at. The loss of skilled employees can lead to lower productivity, and poorer quality of work. 

It’s difficult to put a dollar figure on the hidden costs associated with turnover, but it’s still important that employers understand the ripple effect they can cause. Which includes reduced employee job satisfaction, engagement, and overall employee morale. All of this leads to increased turnover rates, decreased productivity, and a negative impact on customer service. You want your customers to deal with happy employees!

Diving into employee turnover

Without an analysis of employee attrition, it’s hard to see the extent of the issue and identify underlying causes. Managers who aim to reduce employee turnover need to determine the company current turnover rate:

# of terminated (or left) employees/ total number of employees * 100

For example, if a company has 1,000 employees, and 70 employees left or were terminated, the employee turnover rate would be 7 percent. 

The national average turnover rate is 3.7 percent. If your turnover rate is higher, you need to take it as a red flag. 

Dive into overall turnover rates, and evaluate rates for involuntary, and voluntary turnover rate, as well as new hire turnover rates. Exit interviews can be used to reveal problems within the workplace.

Need a fun and new way to reduce employee turnover rates? Look no further than LEON

Dedicated wellness expertise each step of the way.