Two employees working in a retail store.

The real cost of employee turnover

Thursday, December 11, 2014

Understanding the impact of high turnover at your business

The turnover rate for employees has significant financial impacts on a business’ operations. However, the cost of employee turnover extends well beyond money and financial implications. In fact, having departed employees on a regular basis can lead to decreased employee morale, lost productivity, a weakening of the company brand, and a higher employee turnover rate over time. This article will define employee turnover, explore the costs to a company when an employee leaves, identify some of the causes of losing top talent, and finally, discuss ways to prevent high turnover and promote a strong work environment.

What is employee turnover?

Employee turnover refers to the number of employees that leave a company during a given time period. While even the best employees may leave for certain reasons, consistently high turnover rates are indicative of deeper problems within a business. Some turnover is to be expected. A 2021 study from the Bureau of Labor Statistics reported that the average annual turnover rate is 57%. This rate applies across many different sectors and industries in the United States. Industries with higher rates of turnover are typically those that are labor intensive, including retail, manufacturing, and technology.

Turnover of employees can be either voluntary or involuntary. Voluntary turnover involves the employee making the decision to leave the company, whereas involuntary turnover refers to employees being terminated or asked to leave by the company. Involuntary turnover is more controllable, particularly if your company has established vetting and interview processes in place to find long-term employees. These processes may include background checks, robust interview processes, and even new hire interviews to ensure the candidates are a strong fit for the company. Voluntary turnover is harder to control since these decisions are made by the employee themselves.

What causes employee turnover?

The causes for involuntary turnover and voluntary turnover are generally quite different, however both do include the employee experience and factors that go into employee performance.

Causes of involuntary turnover

Causes of involuntary turnover often relate to a poor fit or poor performance within the company structure. For example, you may have an employee who consistently is not completing their work tasks. Or, in some cases, employees violate a rule or part of the employee handbook that would lead to grounds for termination. Often, involuntary turnover comes from more extreme circumstances, particularly when there is a threat to the team performance or a lack of employee development over time.

Causes of voluntary turnover

As mentioned, voluntary turnover is harder to control and stems from a wider array of factors. A common reason for this type of turnover is when an employee is negatively impacted by the company culture. For example, if working in a job that requires long hours with high demands, the employee may experience burnout over time. Or, there may be a toxic work environment where people are talked about poorly and not treated with respect. Either of these situations could lead an employee to seek other options for their career development.

For industries that are competitive and offer desirable employee benefits, including healthcare and other perks, a company may struggle to keep employees if they also don’t maintain high levels of compensation. An employee may decide to leave if they are offered a new job with a better benefits package that will also provide them with a better work-life balance.

Voluntary turnover can still happen even with desirable benefits, including paid time off or a high annual salary. Sometimes, after a period of working with a company, team members may desire a change of pace or a change in industry. This type of turnover is harder to predict and can take place without much notice. The employee may see an open position for a job they have wanted for a long time and may feel compelled to depart your organization even if there isn’t necessarily a major problem taking place.

How much does employee turnover cost?

Before getting into the actual cost of employee turnover, it is necessary to recognize the importance of always striving to lower your company’s turnover rate. Retention strategies will be explored in the next part of this article, especially since there are tangible ways in which you can decrease turnover by at least 25%.

When it comes to the actual costs of losing employees, there are a variety of estimates available, depending on the level of your employee, the responsibilities they hold, and the employee’s annual salary. If you have an entry-level employee making $36,000 per year, you can expect to spend $12,000 to replace this role. For an executive making $150,000 per year, you can anticipate costs as much as $50,000 to replace this role at your company. These costs are estimated from the investment you will have to make in recruiting, onboarding, and training. Training costs are generally around 10-20% of the employee’s annual salary.

Of course, there are innumerable indirect costs when it comes to high turnover, especially outside of the financial realm. In addition to actual costs, you will likely experience damage to your reputation as an employer, a loss in productivity as you search for a replacement, a decrease in employee morale, and increased resentment in the workplace for shifting team dynamics. The loss of productivity is particularly notable as it has been estimated that it can take one or two years to bring a new hire up to the productivity of the person that they replaced.

You may also experience costs related to employee engagement. When team members observe many employees leaving, they may disengage with their work and be less motivated to complete their tasks. This could lead to additional costs, especially if unmotivated employees make errors or mistakes in their work. The bigger cost in this case, however, is the cultural impact on human resource changes. This is why considering ways to reduce turnover is critical as employers navigate the reality of the Great Resignation currently taking place.

How can I reduce turnover?

Preventing employee turnover

Reducing turnover is a strategy that all business owners should consider as they develop and expand their team. Avoiding an employee's departure from the company can save your company time and money as well as preserve the strong team culture that you have set out to establish. Some of the most important approaches to consider in the reduction of employee turnover include:

  • Recognize employees on a regular basis. Employee recognition includes a large spectrum of options for employers to communicate their appreciation. Employee recognition can include individualized notes acknowledging a recent accomplishment or contribution, or providing gift cards or a lunch out to show your appreciation for being part of the team. It is important that employees receive recognition both spontaneously and on a more standardized basis. Your company may consider introducing awards (like employee of the month) or quarterly celebrations so that employees feel their work is seen, acknowledged, and part of a larger contribution towards the company’s overall vision, mission, and goals.
  • Audit how employees experience company culture and be open to making changes. Soliciting feedback from employees about their experiences within your company can help you make policy or cultural shifts that will keep employees engaged and wanting to stay with your organization. For example, sending out surveys around work schedule, diversity initiatives, workload, meeting logistics, or team structure could help you understand what your business is doing well and what areas may need tweaks or changes to have more sustainability.
  • Provide a mechanism for bilateral, regular feedback. Receiving feedback from employees (as mentioned above) can be extraordinarily valuable. However, you will also want to provide feedback to your employee using a consistent and clear system for doing so. Some companies might provide regular feedback via email or messaging. For employer feedback, you might set up a locked box that can hold suggestions that your team may want to communicate anonymously. The important aspect here is maintaining an established way to communicate so that employees feel their voices are heard and respected, and that they can be a part of larger, systemic change at your business.
  • Increase employee benefits. One of the most important ways you can incentivize employee engagement and long-term commitment to your company is by providing a comprehensive benefits package. The package may include standard benefits, like health insurance, paid time off, and 401k contribution. You may also consider getting more creative and thinking of other benefits you can incorporate, like maternity/paternity leave, stipends for ongoing education, discounts from other businesses, mental health coverage, and work schedule flexibility. Ancillary benefits will stand out among other employers that new employees might be considering in the job search process. Additionally, those added benefits might benefit the cohesiveness of your team, as they help to ensure your employees feel like valuable members of your team.
  • Conduct exit interviews to analyze trends that take place in employee turnover. In the instance that your business does experience voluntary or involuntary turnover, it is important to gain data and information about why this took place. A great source to gather data related to employee departures is through an exit interview. During the exit interview, you can ask questions about the employee’s experience at the company, including what they liked and what they would like to see change. You can ask about management structures, relationships with co-workers, and even how supported they felt in their position. When you can aggregate this data with other exit interviews, you might be able to see larger themes that your company can address in order to encourage stability within the organization.

Retention Tips

Avoiding the departure of employees isn’t only about prevention; it is also about proactively building a workplace that employees want to be a part of. To that end, it is also critical to examine retention rates at your company and to understand why employees stay in their roles over periods of time. This will encourage your company to keep doing what works.

Some employee retention tips include:

  • Implement a health award program. Health award programs, in addition to health insurance benefits, reward employees for taking part in health initiatives. For example, you can reward employees for going to the gym or taking a certain amount of steps per week. This way, your company is going above and beyond to promote personal wellness for your team outside of their position and role.
  • Identify your employee retention rate. Once you understand the amount of turnover you have, you should also calculate your company’s retention rate. By doing so, you will keep this as a benchmark or baseline to grow from with the hopes that you never go below this established rate for retention.
  • Don’t assume that everything is positive. Employees that have been at your workplace for a while may not necessarily be satisfied with their job. Moreover, they might be biding their time and waiting for the next right position to come along. As such, having regular touch points with your employees for ongoing feedback is a great way to keep tabs on overall employee morale.

Mitigating employee turnover

Instead of being reactive, employee retention should be a pillar of your business model. If you are able to build out a strategy for retention, you will have a team that can represent your brand strongly, understand the ins and outs of business operation, and promote a positive image of your brand within their communities. Empowering your team to show up and be a part of something together will not only help the business thrive, but also establish a team that is desirable for many to be a part of.

Next steps

Are you ready to understand the true cost of employee turnover? Are you ready to avoid unnecessary replacement costs? Are you ready to amplify your company’s retention plan?

Heartland is ready to help.

Heartland helps nearly 1,000,000 entrepreneurs make and move money, manage employees and engage customers with human-centered technology solutions that allow them to rise above the daily grind and lead their businesses into a brighter future. Learn more at heartland.us