September 21, 2022

The Real Cost of Employee Turnover

by Mike O'Neill

High employee turnover rates are often a major source of frustration. It leaves company owners feeling stuck and discouraged - like they're caught in a cyclone of wasted efforts and never-ending recruiting measures. Does this sound like you?  

If so, you're probably tired of the way that struggling to find and retain the right employees consumes all of your time. People in your shoes often wear many hats, and there are probably other tasks you'd rather tend to. 

The thing is, struggling to retain employees eats up more than just your time. 

The costs are steep - Literally. 

My decades of HR experience has awarded me a unique view. From this vantage point, I've seen many people fail to connect the dots when it comes to the reality of what employee turnover actually costs them. 

So, I've done some calculating to drive the point home. I'll also walk you through the process of determining what turnover is costing your business, specifically. 

Spoiler alert: You'll be eager to find out. 

It's Time To Start Watching More Closely 

Do you have a guess as to what the average cost of replacing an hourly employee might be? In 2021, it cost manufacturing companies $27,099, on average. All of that money is spent just on the costs associated with finding, hiring, and training a new employee. 

And no, I didn't just pull that number out of the sky.

I used reputable data from The Bureau of Labor Statistics to do the math. 

Why so high? 

Many costs get overlooked, slipping through the cracks bit by bit each time an employee needs to be replaced. While not all companies have the same procedures, there are some common culprits that go undetected, such as the cost of advertising a position. 

Additional money eaters that thrive on employee turnover include things like: 

  • The cost of screening
  • Pre-employment testing. 
  • The costs associated with onboarding and training. 
  • The labor costs of the manager interviewing employees
  • The labor costs of the manager training the employee. 
  • The labor costs generated by employees working extra hours while a replacement is found
  • The loss of profits from decreased productivity while a new employee gets up to speed 
  •  The effects of decreases in employee morale that result from having to work extra.

How to calculate your employee turnover rate 

The above list isn't all-encompassing, but now that you've seen some examples that showcase how easily some of the costs associated with employee turnover can fly under the radar, you may be eager to come up with an accurate number to reflect what your company spends. 

It all starts by determining your employee turnover rate. 

This part is quite simple, so long as you have accurate records:

  • Determine the number of employees that left your organization in a given time frame.
  • Determine what your average number of employees was during that same time frame.
  • Divide the number of employees that left your organization by your average number of employees.
  • Multiply that number by 100 to convert it to a percentage.
  • This is your turnover rate for the period you utilized data from.

Getting to the Bottom of Your Costs 

To get an accurate idea of what this looks like, you're going to need data and a lot of it. However, if you're lacking insight into the types of spending mentioned above, there's nothing to be embarrassed about.  While most people understand their direct and indirect labor costs, it's common for all of those other seemingly "little" details to get side-stepped.

  • If you're an established company, your HR department should have access to data about the ins and outs of your hiring process.
  • From this data, you can go back through specific receipts and financial statements to start looking for the actual costs of what goes into those procedures. 
  • After determining this and also figuring out how much labor goes into training, you should be able to determine the expenses that occur with each hire. This number is your cost per individual turnover.
  • However, it's worth pointing out that not all math will be cut and dry. For example, you may have a recurring monthly or annual charge for a service that you use for hiring alongside other things, requiring you to determine how much of that cost to assign to hiring. 
  • After figuring this information out, you can then multiply the cost per individual turnover by the number of employees during the most recent calendar year. This reveals the often shocking truth of how much you're wasting annually on employee turnover. 

Looking for a Simpler Way to Figure Out Your Costs?

Not everyone has the time, help, or patience to hunker down and move through the process of breaking down the individual prices associated with their onboarding process.

Luckily, there are some formulas and calculators out there that simplify the process. While these tools aren't 100% accurate, they can give you a general idea of how much money poor employee retention is siphoning from you each year, enabling you to start making changes now rather than waiting for the following year's data.

MANUFACTURING

SUCCESS

How to Make Your People, Processes, and Planning Systems So Strong Your Growth is Inevitable

The only playbook you need to create a game plan for your growing company to achieve high profits, morale, and productivity in the manufacturing sector.

Related Reading

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}
>