The True Cost of Replacing An Employee (And Why You Should Know It)

The cost of replacing an employee goes far beyond the numbers you can add up on a calculator. When your best workers walk out the door, the impact on your business can be felt in significant ways.

When you’re trying to run a business, normal days and regular expenses can make it tough enough. You don’t need the additional stress of trying to get things done with fewer workers and more costs!

In this post, we’ll help you unpack the real costs of employee turnover and give you some ways to minimize them so you can keep on growing your business with a rock-star team of happy employees.

Cost of Replacing An Employee

cost of replacing an employee

COVID introduced us to more than the first pandemic in 100 years. It also led to multiple changes that none of us would have imagined just a couple of years ago.

Businesses closed their doors and laid off employees overnight, entire industries were forced to pivot to new ways of work, and many workers saw an opportunity to do something different.

“The Great Resignation” is a term created to describe the voluntary exiting of millions of workers from their jobs over the last couple of years. When we were suddenly forced to make drastic changes to how we lived and worked, many people decided that it was a good time to make a career change.

Regardless of why someone leaves a company, it makes an expensive impact. Peoplekeep.com lists several areas affected by employee turnover in a post titled “Employee Retention: The Real Cost of Losing An Employee.”

  • Recruitment – It takes money to advertise new positions, process applications, conduct interviews, and actually hire someone.
  • Onboarding – Once you officially hire someone, the costs don’t stop. The onboarding process means spending money on training, supplies, equipment, name badges, key cards, uniforms, etc. (Plus until the new employee is actually doing work that generates revenue, they are a liability, not an asset.)
  • Productivity – Obviously, productivity comes to a halt in a particular role when no one is there to do the job. But even after you hire someone, it can take quite a while for a new employee to reach a peak level of productivity where they fully understand their role and are making significant contributions to your overall business.
  • Morale – When the rest of your team sees employees leaving, it definitely affects their morale. If layoffs are involved, they’ll naturally wonder if they could be next. If people are leaving voluntarily, they’ll naturally wonder why…and if they should have an exit strategy too.
  • Customer Service – Empty positions, inexperienced employees, and low morale all result in less-than-optimal experiences for your customers. If that goes on long enough, your bottom line will be directly affected as they decide to take their money elsewhere for better service.
  • Training – The ongoing costs of keeping work skills sharp usually amount to anywhere from 10-20% of an employee’s annual salary.
  • Institutional Knowledge – Anytime an experienced, well-trained employee leaves your company they take with them a certain level of knowledge about how your business works and what it takes to be successful in their particular role. Years of such efficiency and institutional knowledge are not easily replaced, and they definitely represent added costs to your business.
  • Culture – A thriving company with happy, established employees naturally has a positive culture that people want to be a part of. When there are employment “gaps” in your team, that culture suffers. And even when new people are added to fill those roles, they aren’t always a good fit right away (if at all). When your culture suffers, everything else does too!

How to Calculate Turnover Cost

While there are plenty of intangible costs when employees leave, it is helpful to be able to have an idea of the actual amount of money that turnover is costing you. Because it can often cost thousands of dollars to lose and replace employees, it’s worth taking the time to determine what that number is so you can minimize it as much as possible.

According to The Predictive Index, you can figure costs associated with employee turnover with a fairly straightforward formula:

Vacant Position Coverage Cost + Cost to Fill the Position + Onboarding & Education Costs + Productivity Ramp-up Costs x Number of Employees Lost Annually x 12 = Annual Turnover Costs

  • Vacant Position Coverage Cost is the total of what that position previously paid per day multiplied by the number of days it has been vacant. 
  • Cost to Fill the Position is all of the expenses related to advertising, screening, and interviewing…including the time of current employees to do those things.
  • Onboarding & Education covers any training expenses.
  • Productivity Ramp-up is the estimated 60-90 days that it takes a new hire before they actually begin helping to generate revenue for the company. Until then, they are an expense.

Those 4 factors are then added together and multiplied by the number of employees your company typically loses each year in that position. (Some roles will have a higher turnover rate than others.) Then, that number gets multiplied by 12 to give you a final amount that represents your Annual Turnover Costs.

True Cost of Attrition

Attrition is a way of describing the process of employees leaving an organization for any reason, whether on their own, through termination, death, or retirement.

As part of a course on Organizational Learning and Development by Dr. Britt Andreatta, LinkedIn Learning has a helpful PDF with a couple of built in calculators to help you quickly see how much attrition and employee disengagement could be costing you. 

Attrition calculations are based on SHRM estimates that the loss of an employee can cost anywhere from 50-250% of that person’s salary. 

Disengagement calculations related to dissatisfaction among remaining employees are based on Gallup surveys showing that 17.2% of employees are unhappy at work, costing owners up to 34% of their annual salaries

You Can Avoid High Employee Turnover Cost

cost of attrition

You don’t have to be the victim of high turnover costs! In fact, we think you deserve to have happy employees who want to come to work each day ready to help you move the company forward.

You can avoid high employee turnover costs in a few basic ways:

  1. Hire well. By slowing down and taking time on the front end of a new hire, you can ensure that you are getting a high-quality candidate who is genuinely a good fit for your company. Resist the urge to panic and simply fill a seat as fast as possible. That’s a mistake that will cost you!
  2. Invest in your team. Spending tremendous time and energy to hire someone only to neglect them once they’re in the position is like dating, proposing, and then barely speaking after the wedding. Be sure to regularly pour into your staff to let them know they are valuable to you. They’ll reward you with continued loyalty and productivity.
  3. Listen. As we mentioned in a previous post titled “How to Combat Low Job Satisfaction (And Help Your Employees Succeed)”, one of the best things you can do to combat low job satisfaction is to regularly listen to your employees. It may cost you a little time and you may not always like what you hear, but it will save you a lot of money and headache in the long run!

For personalized help with managing your teams better and streamlining your HR processes, schedule a call with our team! We’re a CPA firm that does a lot more than taxes. Find out why our clients love taking advantage of our 40+ years of business wisdom!

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