The True Cost of Employee Turnover

I was listening to a podcast episode of Eat, Sleep, Work Repeat. Bruce Daisley was talking to Zeynep Ton about making the case for good jobs. At some point, Zeynep said, organisations don’t know the true cost of turnover. That phrase true cost of turnover stayed with me, and I wondered if I truly understood the true cost of an HR professional beyond calculating the cost of turnover and recruitment. It made me think of the associated cost of growing commitment and engagement, which needs to be factored into the cost of turnover. I thought to dig deeper into the associated costs of turnover.  
 
Employee turnover is an issue organisations face globally, and its impact is often underestimated. The costs associated with employee turnover aren't just financial; they also involve the loss of knowledge and productivity, adverse effects on team morale, and the time and resources required for training new employees. 
 
Financial Costs 
 
The financial burden of employee turnover can be significant. According to a study by the Society for Human Resource Management (SHRM), the average cost of replacing an employee can be as high as twice the employee's annual salary, especially for high-level or highly specialised roles. This cost encompasses recruitment, training, and the loss of productivity during the transition period. 
For instance, consider a tech company that loses a software engineer earning £70,000 annually. Including recruitment costs, training for the new hire, and the productivity gap, the total cost could reach up to £140,000. 
 
Productivity Loss 
 
When an employee leaves, productivity dips. The remaining employees often need to take on extra responsibilities until a replacement is found, which can take months. Even when a new hire is onboarded, they won't be as efficient as the seasoned employee initially, leading to a productivity gap. 
 
Consider the example of a sales manager at a car dealership. If this experienced manager leaves, not only does the dealership lose its established customer relationships and sales acumen, but the rest of the sales team may also have to fill in, leading to reduced sales performance. Suppose that sales manager A (now leaving) makes a monthly sale of £500,000, and sales manager B makes a monthly sale of £500,000. No matter how brilliant sales manager B is, one could hypothetically guess that sales manager B will not all of a sudden start to bring in £1,000,000 monthly. Or, for those of us who love data, you could do a simple calculation if you know the performance baseline: Productivity Gap = Productivity level with the staff member - Average productivity level without the staff member. 
 
Impact on Morale and Employee Engagement 
 
Employee turnover can also significantly impact the morale and engagement of the remaining employees. When they see colleagues leaving, particularly in high numbers, it can create uncertainty and lower job satisfaction. 
 
Suppose an experienced nurse manager in a hospital resigns. This can cause anxiety among the nursing staff, affecting their job performance and patient care quality. It can also lead to a domino effect, causing other nurses to consider seeking employment elsewhere. It is often difficult to measure this cost, but a pulse survey may provide insights into the impact of those left behind. We can learn from the research on those left behind after a restructuring. Issues such as the change in team dynamics, decreased trust in management with high turnover as people fill in the gaps as to why colleagues are leaving, and impact on customers as shown in the nurse manager example.  
 
Training and Development 
 
Training a new employee takes time and resources. It’s not just about teaching them the technical aspects of their role but also about integrating them into the company culture and helping them build relationships. 
 
Taking an example from the hospitality industry, a hotel losing a front desk manager would require the new hire to understand their responsibilities, learn the hotel’s customer service standards, and develop a rapport with regular customers. These costs will vary. The immediate cost that comes to mind is the main cost of the training, employee time in training and other miscellaneous costs, like accommodation, expenses etc.   
 
The Hidden Costs 
 
The indirect costs, such as damage to customer relationships and brand reputation, can be harder to quantify but are equally impactful. Customers build relationships with employees, not companies. If a key contact leaves, it could potentially result in lost business. 
 
In the example of an account manager at an advertising agency, their departure might disrupt the relationship with their clients, affecting client satisfaction and potentially leading to lost business. 
 
In conclusion, the true cost of employee turnover is multi-faceted and often higher than anticipated. Businesses should focus on employee retention strategies and nurturing a positive work environment to reduce turnover rates and associated costs. In my next post, I will look at the antecedents of employee turnover.  ​