Employee Turnover Costs

Employee turnover is a costly problem that can seriously impact your business.

Every time an employee leaves, it costs your business time and money. The cost of employee turnover can be as high as 213% of the employees’ annual salary.

You can do many things to reduce employee turnover and save your company money. By understanding the different types of turnover and the factors contributing to it, you can put in place solutions that will help keep your employees happy and reduce those costly turnovers.

This article will cover the types of turnover, the specific costs that are incurred, the factors that contribute to those costs, and the solutions that help reduce employee turnover.

What is employee turnover?

Employee turnover is the percentage of employees who leave an organisation within a certain period. Employee turnover can be voluntary or involuntary.

The employee turnover rate is the number of employees leaving the business within a specified time frame. For example, this time frame could be a year, a quarter or a month.

Employee turnover is divided by the total number of employees that leave by the total number of employees that work in that time frame, multiplying the result by a hundred.

Employers should seek to minimise the employee turnover rate as much as possible. This could be a valuable KPI to measure the performance of the organisations of HR Function. It is also one of the metrics companies should benchmark before and after implementing behavioural and cognitive ability assessments.

Types of Employee Turnover

Voluntary Turnover

Voluntary turnover is when an employee leaves their job voluntarily by resigning. Employee dissatisfaction can be caused by various factors, such as poor working conditions, low pay, lack of career advancement opportunities, and bad relationships with co-workers or supervisors. In addition, unhappy employees are more likely to seek new employment elsewhere. Therefore, this undesirable employee turnover should be measured and monitored closely. Fortunately, there several ideas that we will cover in this article that can help reduce employee turnover.

Involuntary Turnover

Involuntary turnover happens when an employee is let go or fired. The most common reason for involuntary turnover is poor performance. Employee performance can be affected by various factors, such as skill level, motivation, and work environment. When an employee is not performing up to par, it reflects poorly on the company and can lead to the individual being let go. In some cases, it may be necessary to terminate an employee. That said, Involuntary turnover is by far the most undesirable form of employee turnover, and the causes of this type of turnover should be analysed in greater detail.

Involuntary turnover can hugely damage employee morale, especially if there are concerns or perceptions that the performance-related concerns are not justified or could have been mitigated by the leadership team. Companies often make a mistake by hiring good people for the wrong role. We suggest learning more about Behavioural Assessments, Cognitive ability assessments and Job Assessments to help reduce unnecessary instances of Involuntary turnover.

Why does employee turnover matter?

Employee turnover can have many consequences for businesses, both good and bad.

On the positive side, employee turnover can lead to new blood and new ideas. It can also be an opportunity to get rid of poor performers. On the negative side, employee turnover can lead to a loss of institutional knowledge, productivity, and morale. It can also be costly in terms of direct and indirect costs.

Overall, employee turnover is a normal part of doing business. However, keeping track of your turnover rate and minimising the negative consequences whenever possible is important.

We advise organisations to measure their turnover rate, benchmark it to their turnover rates within their industry and country they operate in, and also analyse any sudden changes in that figure.

How much does employee turnover cost?

Employee turnover costs can be divided into three main categories: direct, indirect, and opportunity.

Direct costs are the most obvious and include the costs associated with recruiting and training new employees. These costs include advertising, background checks, drug tests, and onboarding.

Indirect costs are less obvious but can be just as costly. Indirect costs include the loss of institutional knowledge, productivity, and morale.

Opportunity costs are the potential gains that are lost when an employee leaves. These can include the cost of foregone sales, clients, and projects.

The total cost of employee turnover can be quite high. For example, the cost of replacing an entry-level employee could be as high as one-fifth of their annual salary. The cost of replacing a mid-level employee could be as high as one-third of their annual salary. And the cost of replacing a senior-level employee is as high as two times their annual salary.

We recommend using this free Turnover Cost Calculator to calculate a much more precise estimate of your organisation’s turnover costs.

The true costs of turning over

Employee turnover can have several consequences for businesses, both direct and indirect.

Lost productivity

Employee turnover can lead to a loss of productivity. This is because it takes time for new employees to get up to speed and be productive. In the meantime, existing employees may have to pick up the slack, leading to burnout.

Depleted employee morale

Employee turnover can also lead to depleted employee morale. This is because employees may become discouraged when they see their friends and colleagues leaving and question their commitment to the company. In addition, high turnover can create a feeling of insecurity and instability within the workforce.

Diminished employer brand

Employee turnover can also lead to a diminished employer brand. This is because when employees leave, it reflects poorly on the company. In addition, high turnover can make it difficult to attract and retain top talent.

Factors that lead to High Turnover

Managers and leadership

One of the most important factors in employee turnover is managers and leadership. Employees unhappy with their managers are more likely to leave the company. This is because managers set the workplace’s tone and directly impact their employees’ day-to-day experience.

Compensation and benefits

Another important factor in employee turnover is compensation and benefits. Employees who feel underpaid or do not have access to competitive benefits are more likely to leave the company.

Work-life balance

Another important factor in employee turnover is work-life balance. Employees who feel they are working too much or do not have enough time for their personal lives are more likely to leave the company.

Engagement and recognition

Another important factor in employee turnover is Engagement and recognition. Employees who feel engaged and appreciated are less likely to leave the company. The PI Employee Experience Survey is a great tool to measure and take action on Engagement.

Company culture

Another important factor in employee turnover is company culture. Employees who do not feel like they fit in with the company culture are more likely to leave the company.

Lack of growth opportunities

Another important factor in employee turnover is the lack of growth opportunities. Employees who feel like they are not being allowed to grow and develop are more likely to leave the company.

Behavioural and Cognitive Fit

Sadly, despite numerous studies on the effectiveness of selection methods, many organisations still heavily rely on gut feeling and poor indicators of employees’ future performance when hiring decisions. As a result, certain people may be in the wrong jobs and would be far more successful in a job with a more appropriate cognitive and behavioural fit.

To avoid behavioural and Cognitive mismatch or how you can mitigate existing mismatches, check out our Talent Assessments page.

Solutions to Reduce Unwanted Employee Turnover

There are many ways to reduce the costs of employee turnover. For example, some companies offer incentives, such as bonuses or raises, to keep employees from leaving. Others invest in employee development programs to help employees grow and advance in their careers. And some companies offer more flexible work arrangements, such as telecommuting or compressed work weeks, to make their jobs more attractive.

1. Utilise scientific methods of employee Selection

As other articles and sections of the website mentioned, the three best predictors of future performance are Cognitive Ability, Behavioural fit and structured interviews.

Behavioural Assessments and structured behavioural interviews contribute to a reduced Voluntary turnover in two ways; successful hiring and talent development. Employees who fit behaviourally are significantly more likely to enjoy their work and feel they naturally fit the job. Employees who are aware of their behavioural drives and have managers who consider those behaviours are more likely to be satisfied with their work. Contact us to learn how your organisation can utilise the Talent Optimisation Platform to make this a reality, and we will be happy to give a free demonstration.

Involuntary turnover is also significantly reduced because scientific hiring methods enable hiring managers and talent acquisition professionals to hire people who naturally fit the role. As a result, people whose behavioural drives and cognitive abilities fit the role are far more likely to perform in that role than those who don’t.

2. Create opportunities for skills development, knowledge acquisition and continuing education

Employee development programs help employees grow and advance in their careers. In addition, these programs can keep employees from leaving by providing them with the opportunity to learn new skills and knowledge.

Investing in Leadership Development Programmes and Specialist Development Programmes will not only improve the effectiveness of Leaders and Specialists across the organisation but will also signal that the organisation is serious about investing in every employee’s career growth and personal development.

3. Invest in the onboarding process

Onboarding is the process of acclimating new employees to the company. A good onboarding program can help reduce turnover by ensuring that new employees are properly oriented to the company and its culture.

4. Develop career paths and opportunities to grow

Providing employees with opportunities to grow and develop can help reduce turnover. Employees who feel they can advance in their careers are less likely to leave the company.

Raising awareness of the Leadership Pipeline Concept and the Specialist Pipeline Concept will also motivate those who may not necessarily see themselves in their career’s traditional ‘next step’.

5. Remember to keep up with the Market

Employee compensation should be competitive with other businesses in your industry. Employees who feel underpaid may be more likely to leave the company.

When good employees leave, some organisations may be forced to pay higher than market salaries to entice people with comparable attributes to leave their existing behaviour. Furthermore, the organisation will incur significant costs in their pursuit to recruit and onboard those replacements. Not to mention the risk that the replacement will not succeed in the role; this risk is unfortunately rarely accounted for and sometimes not considered. Therefore, it would be very rational for organisations to keep up with the Market even if it appears as if the employee is happy with their salary and is likely to stay.

6. Set Clear Expectations

Employees who are not given clear expectations are more likely to be dissatisfied with their jobs. Therefore, ensure that you set clear expectations for your employees, so they know what is expected of them.

7. Monitor Team Alignment with Business Goals

A critical component of the Talent Optimisation Framework is aligning people strategy with business strategy. For employees to succeed at their job and be satisfied with their roles, businesses know the level of team alignment with business goals. Maintaining this alignment, addressing caution areas, leveraging team strengths and improving team cohesion will result in greater performance and job satisfaction.

Improved performance and job satisfaction will, of course, contribute to reducing both Voluntary and Involuntary turnover.

8. Define (and update) Organisational and team culture

The organisational and team culture should be defined and updated regularly. This will help ensure that employees are comfortable with the culture and feel like they are a part of it.

9. Make sure your Employee Value Proposition is up to date

The Employee Value Proposition (EVP) is the set of benefits and perks that a company offers its employees. It is important to ensure that your EVP is up to date to reflect the needs of your employees.

10. Be consistent with Performance Reviews and OKRs

Performance reviews, OKRs, and objectives should be consistent so that employees know what is expected. This will help reduce turnover by ensuring employees are satisfied with their jobs.

11. Recognise and reward employees regularly

Employee recognition and rewards are important for retention. Employees who feel appreciated are more likely to stay with the company.

12. Assess Flexibility and Work-Life Balance

It is important to assess your employees’ flexibility and work-life balance needs. If your employees feel like they cannot balance their work and personal lives, they may be more likely to leave the company.

13. Measure and Analyse Employee Experience

Employee experience can have a big impact on turnover. Measuring and analysing employee experience can help businesses identify areas they need to improve.

14. Provide Employee Assistance and Support

Employee assistance and support can help reduce turnover. In addition, by supporting employees, businesses can show that they care about their well-being.

15. Implement an Employee Retention Plan

An employee retention plan is a set of strategies businesses can use to keep employees from leaving the company. Implementing an employee retention plan can help reduce turnover costs.

16. Investigate existing turnover

Employee turnover rates can vary depending on the industry, company size, and other factors. Therefore, it is important to investigate existing turnover rates to benchmark your company’s performance.

Don’t Forget the ‘Platinum Rule.’

The ‘platinum rule’ is to treat others how they want to be treated. This simple concept can make a big difference in employee retention. By taking the time to understand the needs and wants of your employees, you can show them that you care about their well-being. This can go a long way towards reducing turnover. This is possible by utilising the Hire and Inspire Modules of the Talent Optimisation Platform. Managers will help decrease employee turnover rates by being aware of their behavioural and direct reports, analysing the relationship guide (generated by the Talent Optimisation Platform) and benchmarking their direct reports profile against the existing job target.

17. Encourage Employee Feedback

Employee feedback is important for retention. In addition, encouraging employees to give feedback can help businesses identify areas where they need to improve.

Summary

Employee turnover can have several consequences for businesses, both direct and indirect. Employee turnover can cause workflow disruptions, decreased productivity, and increased costs. Employee turnover can also lead to a loss of institutional knowledge and skills and damage company morale. Businesses need to invest in employee retention strategies to reduce employee turnover costs,

Employee turnover rates can vary depending on the industry, company size, and other factors. Therefore, it is important to investigate existing turnover rates to benchmark your company’s performance.

Common methods for reducing employee turnover include providing opportunities for skills development, investing in the onboarding process, and offering more flexible work arrangements.

Ready to decrease your employee turnover costs?

The talent optimisation platform can help you do just that. We provide a free demonstration of the software ready for companies serious about decreasing employee turnover rates.

Once you see how the software can help, you’ll be blown away by the results. We can help you create successful unified teams, keep a pulse on employee engagement, and inspire high-performing employees and teams. Decreasing your employee turnover costs has never been so easy.

Contact us for a free demonstration today!

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