Measuring the Real Cost of Employee Turnover
Mar 03, 2022
The eminent continuous improvement expert W. Edwards Deming once said “American companies are full of managers who think they know the cost of everything, but in reality they know the value of nothing.” This quotation summarizes the state of employee turnover in U.S. companies. As a result, the true cost of turnover is greatly underestimated and underappreciated by most organizational leaders.
The True Cost of Employee Turnover
Gallup, the polling and consultancy group, estimates that U.S. businesses currently experience a cost of roughly $1 trillion in voluntary turnover. They further report that only 15% of employees worldwide are engaged at work, and 51% of employees are currently actively looking for new jobs.
In today’s tight labor market, employee turnover is especially costly. The Society for Human Resource Management (SHRM) cites estimates that one in three workers will leave their jobs this year. However, that may be an underestimate. According to a 2021 study by the Bureau of Labor Statistics, the average annual turnover rate is 57 percent across all industries, which includes both voluntary and involuntary turnover. Obviously, the rate of turnover varies dramatically depending upon the type of industry. Industries such as fast food, retail establishments, call centers, and the like routinely experience turnover of over 100%. Other industries such as manufacturing experience lower rates of turnover, often in the 10%-30% range.
The cost of replacing these workers varies depending upon their role within the organization. At the very lowest end, SHRM estimates the cost to replace a minimum wage hourly worker averages $1,500. Most other HR consulting firms place the cost of replacing an hourly employee at much higher, most in the range of $3,500 to $10,000. However, this is just the cost of lost productivity, overtime, recruiting, background checks, training, and other measurable costs. It does not account for other significant costs such as:
- Reduced customer satisfaction and potential loss of customers
- Lost organizational knowledge
- Deferred or lost revenue
- Over burdening remaining employees
- Decreased morale, feeding into a cycle of ever-increasing rates of turnover
- Poor reputation trying to hire new employees.
These costs, while not measurable, are at least equal to the measurable costs noted above.
Making the cost of turnover even higher is the fact that the people who leave voluntarily are most often the best employees – they are the ones that can easily move on to another employer they find more desirable. It is the less employable employees that tend to stick around in many organizations. Thus, an ever descending, negative cycle is created.
Just viewing the measurable costs results in some staggering figures. As was noted earlier, the cost to U.S. businesses is estimated at $1 trillion annually. Drilling down to a finer level, if a turnover rate of 25% is assumed and a conservative cost of employee replacement cost of $3,500 used, a small company employing 100 hourly people will experience a cost that easily exceeds $85,000 per year on hourly turnover alone. That does not include the other costs such as consuming management time, customer impact, negative reputation, morale, etc., which means the true cost is at least double that or $170,000 per year. In smaller firms, the costs are even higher. In a 15-person organization, losing a single person puts enormous strain on the remaining employees and this feeds into a cycle of overtime, overwork, dissatisfaction, and ever-increasing rates of turnover. The costs become far higher, and the business may even be challenged to survive if turnover is significant.
The above costs listed are all a best-case scenario. When non-hourly employees are considered, the costs become far higher. When dealing with managerial employees, the cost of turnover is estimated at, at least, one to two times their annual salary (depending upon their job title). A mid-sized organization with 500 employees may have 50 management people on staff. If they have an average salary of $100,000 per year and turnover is estimated at 20%, the cost is in the area of $1 million to $2 million. Again, it could easily be argued that the true numbers are substantially higher.
The Causes of Employee Turnover
When considering the cost of turnover, there is both voluntary and involuntary turnover. Involuntary turnover is due to poor performance, violations of company rules, inappropriate behaviors, etc. This speaks to poor hiring practices and the like, and is outside the scope of this article. What is the larger (and importantly controllable) cost is voluntary turnover; employees choosing to leave the organization. According to SHRM, the leading reason employees leave an organization is lack of career development opportunities. However, the reasons employees leave are varied.
Compensation and benefits account for less than 10% of voluntary turnover. The solution in most cases is not paying people more, it is treating them differently. Yes, some people will always leave for more pay and benefits, but that is a distinct minority if the other elements of employee retention are properly managed. In fact, over 50% of people who voluntarily leave an organization report that their manager could have prevented them from leaving if they had done things differently.
The Solution to Employee Turnover
The question for companies now becomes, “How do we reduce the rate of turnover and reduce the associated cost?” The good news is that many or most of the above reasons for voluntary turnover are fixable. The solutions, while not necessarily easy or simple, are in most cases manageable. However, what all of the solutions require is management commitment. The solutions to reducing turnover need to be driven by organizational leadership.
The solutions to driving reductions in voluntary turnover can be broken down into two primary categories.
Culture and behaviors are inextricably linked as are processes and systems, so no effort will be made to separate them. Culture and behaviors are the primary driver of employee retention. Key cultural/behavioral elements that have been identified as a key drivers of reduced turnover include:
- The organization promotes flexibility
- Work-life balance is important
- A organization that is welcoming, inviting and inclusive
- People are valued and recognized routinely
- The organization invests in its people
- The organization listens to its employees.
Culture and behaviors are driven by leadership. If leadership has a vision that supports a culture which enables employee retention, it can go a long way in reducing the rate of turnover.
From a process and systems perspective, the key is to have formal structured processes that leadership supports, and leadership holds supervisors and managers accountable for following and supporting these processes. Examples of key process/systems elements that impact turnover include:
- Formal processes for employee development – training, education and ultimately promotion
- Formal policies that support flexibility in terms of onsite vs. remote work and flexibility in hourly schedules
- Formal processes that require supervisors and managers to meet with employees at defined frequencies to discuss career opportunities of all types
- Policies and budgets that support ongoing employee growth, education and training (both in house and external)
- Policies and systems that support inclusion
- Open door policies that encourage employee feedback and interactions.
Note that the types of processes referred to above are those that support the cultural and behavioral elements that drive employee retention.
An example of an organization that does this is a southern fast-food chain called Pal’s Sudden Service. Their turnover rate is only 23% – a small fraction of the industry average. How have they accomplished this?
- They care about employees – the workplace is ALWAYS clean and safe
- They invest in supporting employees – the equipment ALWAYS works and is maintained
- Career and life development – there is ALWAYS extensive training beyond just fast food, such as life skills training and coaching
- Managers ALWAYS provide regular feedback to each employee
- The company ALWAYS shares financial information with everyone.
Note the use of the word ALWAYS. The culture and processes are driven by leadership and not following them is not an option. It is the way that the business is run. The above speaks to a culture that values employees and invests in retaining them. This culture is driven by the company president, who not just supports, but leads these efforts.
Finally, another key element is data. Whenever an employee leaves, an exit interview should be conducted in an environment that and with a person that promotes an open, honest sharing of why the employee is leaving. This is invaluable data that can be used to drive improvements in the culture and processes that impact employee departures. That said, conducting such interviews in a way that provides valid data is substantially harder than it seems and requires more effort that most realize. Additionally, the data is of no value unless leaders and managers act upon it in a visible and meaningful way.
In aggregate, it is estimated to cost U.S. business roughly $1 trillion per year. The fact is that the true cost of employee turnover can never be fully known or quantified as accounting systems only pick up fractional elements of the cost of employee turnover. Effects such as reduced company reputation, decreased customer satisfaction and challenges in hiring new employees cannot be definitively financially quantified.
What U.S. businesses require is that leaders understand that the cost of employee turnover is more than substantial and has a meaningful impact on a company’s bottom line. Once that fact is accepted, cultural and process changes can be made that can dramatically impact employee turnover and deliver a positive financial impact to the organization.
Yes, there are ethical arguments to be made about how an organization is run and how people are treated. And these are valid points that bear consideration. But, ultimately, leaders have a financial responsibility, particularly in public companies. For every dollar invested in employee retention and reduced employee turnover, the return is dramatic.
How can Midlands Technical College (MTC) Support Your Efforts?
MTC offers a wide array of services to organizations of all types including public and private corporations, governmental agencies, and non-profits and of all sizes. Our team has worked with organizations ranging from three to over 100,000 employees. If you would like to discuss how MTC can help you reduce employee turnover, please contact us at firstname.lastname@example.org or 803.691.3907.