What is the Cost of Employee Turnover?

In this article, we’ll look at the cost of employee turnover, break down the direct and indirect costs associated with turnover, and help you understand the causes of high employee turnover and how to reduce it.

Whether high turnover is a problem for your company or not, you can likely benefit from better understanding the impact of turnover, as well as how to keep turnover rates low and employee retention high.

Read on for everything you need to know.

How Much Does Turnover Cost a Company?

The estimated cost of employee turnover ranges from 33% to as much as 2x their annual salary, depending on the source.

A 2017 report by Employee Benefit News found that the cost of replacing an employee was as much as 33% of the employee’s annual salary. For an employee making $45,000 per year, that amounts to a cost of $15,000 to replace them should they leave their job.

Meanwhile, analytics and advisory firm Gallup reports that the cost of replacing an employee costs anywhere from one-half to twice their annual salary.

If Gallup’s estimations are correct, it could cost the company as much as $90,000 to replace the same $45,000 salary employee.

The type of position impacts the cost to replace an employee as well. Experts believe that it costs at least 100-150% of an employee’s salary to replace someone in a technical position, and as much as 213% of the annual salary to replace C-suite employees (e.g. a CEO, CFO, CMO).

To put this into perspective, for a company with 100 employees, averaging an annual salary of $45,000, with an annual turnover rate of 10%, annual turnover costs could range from $150,000 to $900,000 per year.

That may not be taking into account certain indirect costs of turnover, as well.

What Contributes to the Cost of Turnover?

There are a number of costs associated with employee turnover, from the cost of hiring a replacement, to the impact of their absence on the business.

These costs can be direct and quantifiable, or indirect, and harder to put a number on.

Here are some of the factors that make up the employee turnover cost estimates above, both direct and indirect.

Direct Costs

Direct costs of turnover include:

• Hiring costs (e.g. advertising the position, interviewing, screening).
• Incentives (signing bonuses, funding relocation expenses, other benefits to entice new hires to work for you).
• Onboarding and training for the new employee.
• Severance/bonuses or other separation costs to the outgoing employee.
• Cost of hiring temporary employees or overtime while searching for a replacement.

Indirect Costs

In addition to the direct costs of turnover, there are a number of indirect costs, which are harder to quantify but often carry as much (or more) impact as the direct costs.

These may include:

• Loss of productivity while the former employee’s role is unfilled.
• Loss of productivity while waiting for the new hire to get up to speed.
• The cost of mistakes and mishaps made by a new, inexperienced employee.
• Increased workload for other employees, leading to reduced morale and engagement.
• Increased absenteeism from burned out or overworked employees, as a result of the extra workload.
• Loss of knowledge or vital skills from the outgoing employee, which may be hard to replace.
• Impact on customers who may have developed a good relationship with the outgoing staff member.
• Negative impact on company culture, and the ripple effect this can have on productivity, engagement and retention.
• Negative impact on your company’s reputation, potentially making it harder to attract new hires in the future.

Experts say it usually takes 8-12 weeks to replace a knowledge worker, plus 1-2 months for a newly hired employee to reach full productivity.

This loss of productivity will almost certainly cost the business money, alongside the quantifiable cost from looking for a new hire, incentivizing them to join your company, and paying to onboard and train new employees.

But the biggest cost may be the most indirect, which is the cost of high turnover negatively impacting company culture. This leads to further loss in productivity, and is often a difficult trend to reverse.

What is Employee Turnover?

You may now understand that turnover can be a big, costly problem for businesses, and that it’s worth putting energy into decreasing your turnover rate.

But what is turnover anyway?

Employee turnover is when employees leave their job, forcing the company to hire a replacement.

There is voluntary turnover (when employees quit the job of their own accord), and involuntary turnover (when an employee is laid off or fired). 

Generally, when we talk about the cost of turnover and average turnover rates, we’re referring to all forms of turnover, though some sources may refer to turnover as only voluntary separations.

The Average Turnover Rate

The average annual turnover rate is roughly around 10% – however it can differ greatly depending on a lot of factors.

These factors include the industry, job, location, employee demographics, and much more.

Turnover rate will also look a lot differently depending on the time period you choose. By nature, in a smaller time period (e.g. a month), a smaller percentage of jobs will turn over, compared to a year, or a decade, for instance.

The most recent data from the US Bureau of Labor Statistics puts the average monthly turnover rate in the US at 3.50% (down 0.3% versus a year ago). 

Yet the data shows that average turnover rates can be as high as 6.9% or as low as 1.2%, depending on the industry. 

Read more about average turnover rate, broken down by industry and job role, plus other interesting turnover-related statistics, in this post.

What Causes Employee Turnover?

The first step to improving issues with turnover is understanding why it happens.

There are many causes of turnover, both voluntary and involuntary. Here are some of the most common:

• Poor company culture (toxicity, office politics, excessive negativity).
• Excessive workload/pressure.
• Insufficient pay or benefits.
• Low employee engagement.
• Inability to maintain a healthy work-life balance.
• Not enough opportunities for growth.
• Poor performance or bad fit due to hiring the wrong people.
• Ineffective or insufficient training/onboarding.

How to Reduce Turnover

No business will have a 0% turnover rate – that’s just not realistic or attainable (or even desirable).

You can expect some of your workforce to turn over, whether it’s due to the employee getting offers from other companies you can’t match, letting go of underperforming employees, or external factors you just can’t control.

Yet reducing your turnover rate will almost certainly have a positive impact on your business. Here are some things you can do to reduce employee turnover, and the costs that come with it:

• Try to hire the right people for the right roles.
• Do thorough onboarding and training for new hires.
• Offer higher compensation and/or benefits.
• Recognize wins and good performance by your employees.
• Cut out negativity/toxicity in your workplace.
• Provide opportunities for professional growth and development.
• Regularly check in with employees to address concerns and improve job satisfaction/employee engagement.
• Conduct exit interviews with outgoing employees to identify common issues causing employees to quit.

Final Thoughts

The cost of employee turnover can be significant. You have to deal with the cost of hiring and training new staff, the lost productivity while looking for a replacement and while they’re getting up to speed, and you may also need to pay a premium to attract new talent.

Then there is the indirect impact; employee turnover lowers morale, makes it hard to maintain consistency in your work environment, and can lead to bigger issues and more turnover when existing staff have to work more to pick up the slack.

Lowering turnover and improving employee retention is not easy, and takes a long time. While offering people more pay or better employee benefits may entice them to stay, building a positive company culture and making your employees feel engaged and motivated at work is one of the best employee retention strategies.

If you want to build a more profitable business, work on your turnover rate. You stand to save a lot of expense, as well as building a more cohesive and effective team.