Hiring new employees is not as easy or affordable as it once was. Gone are the days where an employer could post a job online, sit back and see a steady stream of high-quality applications come in automatically. Thanks to the surge in online job boards, employer review sites like Glassdoor, and record-low unemployment rates, the market for talented employees is more competitive than ever. Possibly an even greater challenge for HR departments is figuring out how to retain top talent and reduce employee turnover.

There is no getting around the fact that employee turnover is costly and time-consuming. While most employers intuitively understand this, many still underestimate the value of reducing employee turnover and fail to strategically approach this challenge.

The true cost of employee turnover

The cost to replace an employee ranges from six to nine months of that position’s salary, as determined 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 extreme at first glance but the truth is that many experts find these estimates to be very conservative.

To understand the true cost of employee turnover, it is vital for employers to evaluate both the direct and hidden costs involved.

Direct costs are those costs that are most commonly associated with turnover, such as:

  • Separation costs, such as severance pay and administration costs, when an employee leaves the company.
  • Hiring costs, including advertising, interviewing, ATS software, and recruiter fees can add up quickly when a company is experiencing high turnover rates.
  • Onboarding costs, such as administrative costs, orientation costs, training, and mentorships also must be calculated in the cost of turnover.
  • Costs of the unfilled position—The SHRM’s 2017 Talent Acquisition Benchmarking Report determined that the average time it takes to fill a vacant position is 36 days. For these 36 days, employers must find ways, such as bringing in temporary workers or paying overtime hours, to cover this unfilled position.
  • Reduced productivity, as even with robust onboarding practices, it could take anywhere from six months to two years, or even more, to fully assimilate a new employee. It’s safe to assume that a new employee will not work up to their full potential until the employee completely understands his or her job duties and how to perform them. One new employee may not cause much disruption to production but several new hires could reduce productivity to a level that affects the company’s bottom line significantly.

When an employee leaves, the company also loses all the skills and knowledge the employee has gained on the job. This is especially costly when employers lose employees on which they have spent considerable time and resources training and developing. This loss of skilled employees can lead to lower productivity, poorer quality of goods and services, and increased workplace safety issues.

It is often difficult to put a monetary value on the hidden costs associated with turnover, but it still is vital for employers to understand the ripple effect they can cause. Some of the consequences may include reduced employee job satisfaction, engagement, and overall team morale. These can lead to even higher turnover rates, decreased productivity, and a negative impact on customer service.

Analyzing employee turnover

Without a thorough analysis of employee attrition, it is difficult to determine the extent of the issue and identify underlying causes. Therefore, managers who make it their goal to reduce employee turnover should firstly determine the company’s current turnover rate. Here is a useful formula:

Number of terminated employees / Total number of employees * 100 

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

Considering the national average turnover is 3.7 percent, any rate that is higher should be a clear red flag for any company.

In addition to overall retention rates, employers should evaluate both involuntary and voluntary turnover rates, as well as new hire turnover rates. These metrics can provide valuable data to help determine how to systematically reduce employee turnover based on its causes. Anonymous employee pulse surveys, and new hire and exit interviews can reveal problems within the workforce that may be unknown to management.

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How to reduce employee turnover

There is no one way to reduce employee turnover to an acceptable rate. Nonetheless, making an effort to understand employee expectations is a step in the right direction. What do employees not just want, but expect from their employers? Unfortunately, with unemployment at record lows, employees have no problem moving on to the next job if their current employer isn’t meeting their needs.

According to the Bureau of Labor Statistics latest Employee Tenure Summary, the average time employees stay with an employer is 4.2 years. Considering it can take up to two years for a new hire to fully assimilate into their role, this means that employers can expect just two years of full productivity out of any new hire. There are, however, steps employers can take to make employees want to stay well past the average 4.2 years.

Step 1: Hire the right employees

One of the best ways to improve overall retention rate is to improve the company’s hiring strategies. Employers should look for prospective candidates who not only have the necessary skill sets but who also fit well with the company. Employers should develop a strong employer brand that matches the company culture and identify candidates that “fit” well within it.

Step 2: Maintain competitive salaries and benefits

Employees still consider salary as one of the most important factors when looking for a job. Today’s employees also put a considerable emphasis on special benefits and perks, even unconventional ones, such as gym memberships, work-from-home options, and flexible work hours. A recent Glassdoor’s report shows that 57 percent of respondents list salary and benefits as the leading factors when deciding whether to accept a job offer or not. Therefore, continuously reevaluating your salary and benefits package can help you to not only attract high performers, but also to reduce employee turnover.

Step 3: Develop an effective onboarding process

Attracting and hiring the right employees is only the first step. Effective onboarding is linked to improved employee engagement, faster time-to-productivity rates, and better new hire assimilation. Setting up an effective onboarding system, or even implementing a specialized employee onboarding software makes it easy to develop a comprehensive new hire onboarding process that can increase engagement and retention.

Step 4: Offer employees a healthy work-life balance

In one recent study, employees ranked having a healthy work-life balance as one of the most critical factors, second only to salaries, in accepting a job offer. While not all employers can offer flexible work schedules, they can make it easier for their employees to manage paid leave and vacation time. Consider installing easy-to-use leave management software that allows employees to request and managers to approve paid leave and vacation time through a cloud-based interface.

Step 5: Create learning and development programs

Learning and development not only benefit the company but can also help to ensure that high performers stay around. The program and its criteria should be fair, transparent, and understood by employees, managers, and supervisors at all levels. Otherwise, such program that appears unfair or biased could have the reverse effect and increase attrition.

Step 6: Remove toxic employees

If you aim to reduce employee turnover, it may seem counterproductive to consider terminating some employees. However, involuntary turnover is sometimes more than necessary. Toxic staff members can destroy workplace morale and drive even the most loyal employees to seek employment elsewhere. It’s best to cut ties with employees who either help create a toxic workplace environment or can’t meet the company’s expectations.

Step 7: Recognize top performers

A recent Gallup poll of over 4 million employees revealed that employees are more likely to stay with a company if they receive regular recognition. Not only does it boost retention, but employee recognition also seems to boost productivity, workplace safety rates, and employee engagement. To keep the best employees around and reduce costly turnover rates, it is crucial that the company develop a program to recognize top performers for a job well done.

Reducing employee turnover is an ongoing process that requires consistent monitoring. Some of the steps listed above may be more effective for your organization than others. It is up to your managers to determine which ones have the highest impact and go from there.