Employee Turnover Cost: What It Is, How to Calculate It and How to Use It
Employee turnover is expensive.
A 2017 survey by Employee Benefit News estimated that a departing employee costs the employer on average 33% of their annual salary. Most of this cost comes from the required expenses to recruit, onboard, and train a replacement. Simply put, for each departed employee with a $60,000 annual salary the employer can expect to spend $20,000 in replacement costs. And this figure doesn’t include the lost productivity on the business or the salary of the new employee which is typically at a higher pay rate.
To help organizations improve turnover, we put together this beginner’s guide to everything you need to know about total cost of turnover, how to calculate it, and how to use it to discover cost-saving opportunities.
What You Need to Know about Employee Turnover Cost
What is Employee Turnover Cost?
A large portion of employee turnover costs are incurred to hire a replacement employee and train that replacement. Cost of turnover generally has some directly measurable or "hard" costs that negatively impact the organization but many costs or impacts typically associated with turnover are difficult to quantify for most organizations.
Examples of costs of turnover include but are not limited to absence and leave costs, recruiting costs for replacement hires, new hire orientation costs, initial new hire training costs, and internal vs. external hire compensation differential.
The cost of turnover can be broken into the following major categories:
Departure and open position costs
Why You Need to Monitor Your Employee Turnover Cost
Keeping business expenses under control is usually the go-to-answer for this question. The higher the employee turnover rate the higher the cost will grow.
Below are some of the top turnover questions companies are asking. You can find our completed list of the top 25 key human capital questions here.
Are we losing the right people (low performers) or the wrong people (high performers or critical roles/skills)?
What if the departed employee is a high performer?
What if he or she is working in a critical and core position?
Smart companies aim to maintain overall turnover at the manageable level while keeping turnover of high performers, core positions and critical job roles to the minimum.
How to Calculate Your Employee Turnover Cost
Employee Turnover Cost Best Practices
Now that we have covered Employee Turnover Cost and how to measure it, the next step is to figure out how to use this metric to improve your workforce decisions and intervention plans. Below are two use cases of this metric:
Example 1: Integrate talent market data to show the cost savings from retaining talent
Bringing your internal turnover and compensation costs together with external market data can help you understand your workforce like never before.
By comparing current average compensation with the market rate, users can measure, track, and correlate compensation gaps with turnover trends. With salary often cited as the #1 reason for leaving, this should be the first area HR needs to examine for possible drivers for turnover and retention.
Software like SOLVE™️ makes it easy for users to compare the compensation of departed employees with the average market rate and what it would cost to replace with a new hire.
As shown in figure 1, the average compensation of a departed sales staff is around $66,000 but it costs this company well over $87,000 to replace with a new hire. In other words, it costs them $21,000 MORE than what they are currently paying to replenish each departing salesperson.
Figure 1: Comparing avg new hire compensation with avg compensation of departed employees
These numbers can add up quickly since Sales is traditionally a role with a high turnover rate. With over 500 terminations last year, they can expect to spend $10 million more each year on replenishing departing sales staff.
While further investigation is required to pinpoint drivers of turnover, one of the first areas to investigate is the gap between current compensation and the average market rate. According to figure 2, there is a $12,000 or 18% gap in average compensation for those who departed.
Figure 2: Comparing avg compensation of departed employees with avg market compensation
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Example 2: Use scenario modeling to find the best turnover intervention for your company
Picking up where we left off in example 1, now that you know that there is a large compensation gap, the next step is to figure out what kind of increase in salary or improvement in other areas could reduce turnover rate and cost. One effective way you can do this is through scenario modeling.
As seen in figure 3, you should use an analytics model that can project your Total Cost of Turnover and Turnover Rate and compare to your goals based on changes to a series of input variables. Input variables can include current salary vs. market rate gaps, current benefit vs. market rate gaps as well as engagement, promotion, and much more. Using this modeling technique, you can find a set of interventions that are both cost-efficient and achievable.
Figure 3: Forecasting turnover rate and total cost of turnover