How Much is Employee Turnover Costing You?

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As your business grows you will inevitably experience employee turnover and the costs associated with it. These costs aren’t always direct and obvious, mind you, but they’re real. Unfortunately, no organization is immune to turnover and this is especially true if you’re growing or going through a major change.

At times, you may find yourself wondering what your turnover rate is. Perhaps you calculate it and now the question shifts to whether or not your rate is “average” or “normal.” Furthermore, what does your current turnover rate mean for your bottom line?

In this video, Tom Nickalls – Founder and CEO of Castle HR, will walk you through what employee turnover cost is, how to calculate it for your company and what a “healthy” employee turnover rate looks like. (Spoiler: it’s not 0%!)

The reality is that at its best employee turnover is inconvenient. At its worst, it can be a major drain on your company’s morale, efficiency and profitability. You work hard to keep it pretty low, but at times it can get away from you despite your best efforts.

That doesn’t mean the situation is hopeless and you’re at the mercy of luck. In fact, you can noticeably reduce your turnover by implementing the right modern HR strategies. First, however, you must understand where you are today so that you can start to explore what needs to change.

What is a Normal Employee Turnover Rate?

Your employee turnover rate is the proportion of your workforce who leave in a given year. In growing organizations, these people usually need to be replaced. Therefore, this calculation takes into account the number of people who left your organization factored against your average headcount during the last 12 months.

To figure out your turnover rate we recommend that you use our pre-built Employee Turnover Cost Calculator. It will save you some math. You just need to know how many employees you have today, how many employees you had exactly a year ago and how many people left during that time. That includes both people who left on their own (e.g., resigned) as well as those that were asked to leave (e.g., dismissed).

For most SMBs, an employee turnover rate of 10% – 12% is considered to be fairly normal. You may even creep into the 15% range depending on your industry. Between July 2021 and June 2022, the global turnover rate (per LinkedIn) came in at 10.6%. Generally speaking, small growing companies experience more turnover than large established companies, so don’t fret if your rate is higher than the ones referenced here.

How Can Turnover Be Costly?

It takes a great deal of time to interview, onboard and train a new employee. This is time that could have been put to other uses had the previous person never left. That may have been pursuing business development opportunities (i.e., increasing revenues) or implementing efficiencies (i.e., cost-cutting). Instead, you’re investing company time to fill a position that was staffed just a short time ago.

To make matters worse, the previous employee may have left unfinished work, taken the knowledge of key processes with them or disappointed some customers before they departed. Those are a handful of examples, but it’s rare that someone leaves with everything they were responsible for running smoothly.

Now the incoming employee has to ramp up and mend some of those fences. Best case, this is simply a matter of time and effort. Worst case, you’ve lost business or had to burden other members of your team to bridge the gap. These are a few examples of the hidden costs of employee turnover and they can add up quickly.

As a rule, employee turnover is going to cost you between 25% – 200% of the salary for the role you’re replacing. This skews lower for entry-level positions and towards the high end of that range for executives. Let’s assume an overall average of 50% for the sake of simplicity.

If a $100,000 employee resigns tomorrow, expect to spend about $50,000 worth of time and resources on lost productivity. This could be due to dissatisfaction (outgoing person), lower team morale, recruitment and hiring costs, training time, and lost productivity during ramp-up (incoming person).

Is it Possible to Have Zero Employee Turnover?

Unless you’re a very small company and only looking at a brief timeframe, probably not. Even if this was realistic we firmly believe there should be no such thing as a 0% turnover rate. Any company out there claiming they have zero turnover is either not telling the whole truth or has some issues behind the scenes.

The reality is that at times complacency or accountability challenges will arise. In certain situations, it may best to manage those individuals out of your organization. On the other end of the spectrum, each company can only offer a limited number of growth opportunities. Sometimes you may have two-star players but only one promotion available. The act of promoting one of those people may result in the other person seeking their promotion elsewhere.

This is called “healthy turnover” and it’s a natural side effect of employing people. You can’t reasonably expect to be the perfect workplace for everyone all of the time. Your employees have lives and ambitions outside of your control and that’s perfectly okay.

What is “Healthy Turnover?”

Usually, these are individuals who have thrived in their role and are now seeking new opportunities that your company simply can’t offer them. For instance, say you have four stellar Account Executives who all perform above expectations. Three of them are interested in becoming the Sales Manager, a newly created role due to the recent growth at your company. The problem is that you only have one opening.

Upon promoting the most qualified of the three, you should expect a natural exit from at least one of the other two. Even with further growth, you won’t have three Sales Manager roles available at any point in the near future without overstaffing the department or watering down that title. If you’re fortunate, one Account Executive will remain and help the new Sales Manager adjust to their new role.

Ideally, the other Account Executive who later chooses to leave will do so amicably and for a job that allows them to continue climbing their career ladder. Now you can tell future candidates that not only did you progress one career, but two. This will enable you to continue filling your entry- and mid-level roles with highly talented individuals.

How to Improve your Employee Turnover Costs

If your turnover rate is higher than the averages referenced above you do have some work to do. No use hiding from it. The good news is that there are proven methods to improve this metric. Take a snapshot of where you are today and see how much you can improve in the next 12 months. Compete against yourself and don’t worry about anyone else.

Companies with strong Cultures tend to retain their employees for longer tenures. Retaining people for four years instead of two will cut your turnover rate in half. Ultimately, culture is the glue that holds your organization together and making an effort to identify, define and communicate your culture can have a big impact. But this won’t happen overnight. You have to be patient and work at it consistently.

Another key element is how you manage performance. Now more than ever employees want frequent and actionable feedback. A well-executed Modern Performance Review will improve productivity, engagement and ultimately retention within your organization. A strong two-way flow of communication will root out small problems before they become big problems. Plus, your staff will develop faster and go further.

Lastly, reducing employee turnover costs starts at the beginning. The better you are at identifying and hiring people who fit your organization and the role for which you’ve hired them, the longer they will stay. A robust Talent Acquisition strategy ensures you understand exactly what you’re hiring for and therefore the type of person you need for each open position at your company. As any Computer Scientist will tell you, “garbage in, garbage out!”

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