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Organizational Wellness

How to Calculate and Reduce the Cost of Turnover

byWellhub Editorial Team
Last Updated Nov 4, 2024
Time to read: 11 minutes
Identifying the true cost of turnover at your organization is the first step in reducing this bottom-line drag. Here’s how to do it.

Businesses require many moving parts to run and to operate successfully. But there’s one piece no company can survive without: their employees. 

A company’s staff makes the products, performs the services, works with suppliers, coordinates each other, provides support directly to customers, and so many more vital functions. You need your employees. 

But finding them is not as simple as putting out a hiring ad. And, even if you already have the world’s best employees, you aren’t guaranteed to have them on payroll forever. Employee retention is an important goal but a tricky formula to master. After all, salary alone isn’t going to keep your employees at your company — employee wellbeing and benefits are also important parts of the equation. 

When employees then choose to leave your company, you’re facing the age-old problem of employee turnover. Employee turnover can hurt your company in many ways, which is why it’s important to understand turnover, what it is, why it matters, the real costs of turnover, and ultimately, how to reduce it. 

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What Is Employee Turnover? 

So what is employee turnover? Employee turnover is how many employees leave your company within a given amount of time. There are technically two types of turnover: voluntary and involuntary. Involuntary turnover is when you, as the employer, fire or lay off an employee. Hopefully this rarely happens (especially since involuntary turnover can cost 200% of an employee’s salary). 

Voluntary turnover, on the other hand, you have less control over. Voluntary turnover is when an employee chooses to leave a company for whatever reason. About 60 to 70% of employee turnover is voluntary. The highest turnover rate is in the construction industry — a turnover rate of nearly 57% — and the average turnover rate across the country and all industries is about 19%.

But these numbers aren’t everything. Turnover can be a very individual experience at every company. You might have numbers that are higher or lower. While national averages and industry averages can be helpful, it’s most important to track your own company’s employee turnover, so you can see where improvements might be needed, as high turnover rate is usually indicative of deeper problems in a company. 

Why Does Turnover Matter? 

Why talk about turnover at all? Isn’t it just something that happens? Not necessarily. Let’s look at some reason why your turnover rate matters, and why it’s important to track:

  • Morale. Morale can improve productivity, retention, and help your business all around. But while poor morale can lead to turnover, turnover can also lead to poor morale. About 70% of employees feel that having a friend at work is the most crucial part of their work happiness, so even one employee leaving can affect staff morale. 
  • Productivity. Productivity is the bread and butter of a successful business. In fact, productivity is key to a company’s long-term success and overall profitability. Unfortunately, turnover also hits productivity negatively and leads to decreased productivity. 
  • Financial loss. Turnover is an American crisis that costs U.S. businesses $1 trillion. Let’s break down those costs: Turnover costs you about $1,500 for an hourly employee, about 100 to 150% of a salaried employee’s salary, and 213% of a C-level employee’s salary. It’s a problem that leads to very real financial losses. 

Essentially, turnover is a very big problem right now, and it’s costing companies morale, productivity, and financial gains. And that’s not all.

The Cost of Turnover

Let’s look at some of the major costs associated with turnover—and not all of these are financial:

  • Recruitment costs. Finding new employees to replace ones who left costs your company money. In fact, the average hiring cost per employee is around $4,000. Hiring requires advertising, interviewing, and screening to eventually go through the process of hiring a new employee. 
  • Onboarding costs. Once you hire an employee, the onboarding process is up next. Onboarding costs companies about $4,100 per employee. But before you just decide to skimp on onboarding, remember that a good onboarding process is worth it. Employees with a great onboarding experience are more than twice as likely to be extremely satisfied with their place of work and three times more likely to say they have the best possible job. 
  • Lost productivity. While you can hire a new employee to fill someone’s position, there’s still a loss in productivity along the way. It can take one to two years for an employee to reach the level of productivity as an established employee. And that’s not the only way you might lose productivity. When an employee leaves (for whatever reason), the work they normally would’ve done has to go somewhere. Their colleagues have to pick up the slack and spread themselves a little too thin. 
  • Lost engagement. When employees see high turnover, they may be more likely to disengage. Disengaged employees can cost you 18% of their salary. 
  • Customer service errors. If you have employees that work with the public, you may run the risk of customer service errors. Newer hires are simply less equipped to deal with customer problems and may make errors in the attempt. 
  • Training costs. Companies spend about $1,252 per employee on employee development. Training costs can add up when you’re training new employees to make up for a high turnover rate. 
  • Lost knowledge. Not all the costs of employee turnover are necessarily financial. Employees (especially those who have been at the company or in the industry for a long time) have institutional knowledge. They know valuable things both for the job and about useful skills like problem solving. When you lose employees, you’re also losing knowledge. 
  • Cultural impact. About 56% of job applicants consider company culture to be more important than salary. That’s how important culture is. And whenever you have an employee leave, it can have a cultural impact. Employees will take time to ask about why an employee left, and it can affect your culture. 
  • More turnover. Turnover is cyclical. When employees start leaving, others may too. Turnover tends to come in waves. 

How to Calculate the Cost of Turnover

The total cost of turnover at your organization can be calculated with the following formula:

Total Cost of Turnover = Total Number of Employees X Turnover RateX Cost of Average Turnover

For example, say an organization has 100 employees, with a turnover rate of 5% and the average cost to replace them is $4,000.  Their turnover cost calculation would look like this:

100 X 0.05 X 4,000 =  $20,000

Now, you likely know the number of employees at your organization, and you can calculate your turnover rate with easy-to-access data. But how can you calculate the average turnover cost?

For a rough approximation, you can rely on widely accepted averages. For example, it’s estimated that it typically costs 90% to 200% of an employee’s salary to replace them. You can use the typical salaries at your organization to gauge approximately what the average turnover cost is, and then use that to calculate your total turnover cost.

If you want to get more granular, you can follow these steps to crunch an exact cost for your organization.

Measure the Hard Costs of Hiring

To obtain the most definitive information, focus on concrete details. Compile direct dollar costs associated with hiring, including expenses for recruiting, onboarding, training, and any relevant supplies. Additionally, consider the hours invested by each party involved in the process, taking into account recruitment, interviewing, onboarding, and training time.

Calculate the Expense of Onboarding

To calculate the expenses incurred in bringing a new employee on board, consider the labor hours of HR and the hiring manager, as well as associated training or equipment costs. Don't forget to factor in the cost of background checks, drug tests, and other potential pre-employment screenings.

Add in Productivity Losses

Losing an employee erodes productivity across the board from the time they leave until your new hire is up and running (which can be a full year). And losses are not limited to the impacted role itself — managers and team members are also impacted when somebody leaves. There is a noteworthy 30% decline in productivity amongst employees who shoulder the additional workload, according to international research from Sparkbay.

Calculating the cost of turnover will likely be an ongoing process as inflation and other business considerations impact the costs of hiring and onboarding employees.

How to Reduce Turnover

These consequences show what a big deal turnover is to your company. The good news is that you can do something to lower turnover and keep those costs to a minimum. Here are some great ways to start boosting employee retention: 

  • Launch a health benefits program. Eighty-seven percent of employees would consider leaving a company that didn’t focus on their wellbeing. A great way to start decreasing turnover is to increase your focus on wellbeing through a health benefits program like Wellhub. Wellhub provides your employees with access to thousands of fitness and wellbeing partners  to help them improve their wellness. 
  • Offer perks and benefits. About 80% of respondents in a survey said that they would choose a job with great benefits over a job that paid them 30% more. Offering perks and benefits can help show that you care about your employees. Consider fringe benefits as a way to stand out. 
  • Recognize employees. Employees want to be recognized for their great work: Whether it’s recognition in a meeting, a shoutout in the newsletter, a giftcard after a win, a bonus for hard work, recognition goes a long way. 
  • Establish ways to receive feedback. A feedback cycle is important to improvement, right? The same goes in the workplace. Employees can provide you with feedback about what’s not working for them, and you can use that feedback to help make those improvements that will make your company a great place to work and to stay. 
  • Implement a company mission and values. About 56% of employees say they wouldn’t consider working for a company that doesn’t share their values. It’s important to find employees that share your company values. But it’s hard for employees to share your values if you haven’t clearly established them—and your company mission statement. Implement a mission and values to help employees see what your company is about and what you hope to achieve. 
  • Conduct exit interviews. Sometimes employees are going to leave, regardless of what you do. But don’t miss the opportunity to learn why an employee is leaving, and a great way to do that is by conducting an exit interview where you gather information on why employees leave. That way you can discover the root problems and improve your turnover. 

Reducing the Cost of Turnover Through Employee Wellbeing 

Turnover is a challenge every company faces, whether in good times or bad, and the ripple effects are further reaching than some might expect. Losing employees can reduce morale, motivation, engagement, and productivity, and all this can lead to even more if not handled properly. 

Building a company with low turnover starts with taking care of your workforce. Supporting employee wellbeing with benefits and programs that nurture mental and physical wellness is a verifiable boon for turnover. After implementing wellness programs 30% of employers see the greatest impact in employee retention, with even more seeing top results in boosted morale (54%) and stress reduction (30%). 

Happy employees stay where they are. If you’re ready to get started with boosting your benefits to increase retention, talk to a Wellbeing Specialist today.

Company healthcare costs drop by up to 35% with Wellhub! (* Based on proprietary research comparing healthcare costs of active Wellhub users to non-users.) Talk to a Wellbeing Specialist to see how we can help reduce your healthcare spending!

References

Category

Talent Acquisition & Retention

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Wellhub Editorial Team
Wellhub Editorial Team

The Wellhub Editorial Team empowers HR leaders to support worker wellbeing. Our original research, trend analyses, and helpful how-tos provide the tools they need to improve workforce wellness in today's fast-shifting professional landscape.

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