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. Employers are not only having trouble attracting applicants for their job openings, but they’re also having a difficult time retaining their best employees and keeping them with the company for a longer period of time.

The true cost of 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 true cost of employee turnover and just how detrimental high turnover can be to the company.

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.

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 turnover, particularly high turnover, can cause. Some of the consequences may include reduced employee job satisfaction, engagement, and overall team morale, which can lead to even higher turnover rates, decreased productivity, and negatively impact customer service.

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.

Analyzing employee turnover

Without a thorough analysis of employee turnover, it will be difficult to determine the extent of the issue and identify underlying causes. The first step is to determine the company’s current employee turnover rate is by using the following 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.

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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 the issues that may be causing their problems with retention. Anonymous employee pulse surveys, and new hire and exit interviews can reveal problems within the workforce that may be unknown to management without delving deeper into communication with their staff.

How to reduce employee turnover

The best way to combat employee turnover is to understand employee expectations. 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 rates 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.

Step 3: Develop an effective onboarding process

Effective onboarding is linked to improved employee engagement, faster time-to-productivity rates, and better new hire assimilation. Having some type of effective onboarding system, or even 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 an online interface.

Step 5: Create training and development programs

Employee training and development not only benefit the company but can also help ensure that high performers stay around. The most important thing is to develop a program that is fair and transparent and understood by employees, managers, and supervisors at all levels. Any training and development program that appears unfair or biased could have the reverse effect and increase turnover.

Step 6: Remove toxic employees

Terminating employees may seem counterproductive to the overall goal of reducing turnover, but some involuntary turnover is not only good for the company but necessary. Toxic employees can destroy workplace morale and drive even the company’s 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 as soon as possible.

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. If employers want to keep their 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.

Want to learn more about employee turnover and how to reduce it?
Check out Chapter 8 of our Definitive Guide to Enterprise Workforce Management for HR & Operations Professionals—your go-to place on anything workforce management related.