The Real Cost of Employee Turnover

Jim Buchanan | July 16th, 2020


Taming the Turnover Monster   

A while back, several nightly news programs opened with the question, “It’s 10 pm. Do you know where your children are?” It served as a public service announcement to remind parents that a youth curfew was in effect for many cities. A relevant question today for those of us responsible for our company’s talent acquisition program is, “It’s 2020. Do you know where your employee turnover is?” 

If we do business in an industry that has a large concentration of hourly employees, we may have grown accustomed to a high rate of turnover. It’s just a cost of doing business, and there’s not much we can do about it, right? Wrong. Employee turnover can be better managed. But in many cases, it is an invisible monster ravaging your business, and you could be the hero to tame it. 

It really is a monster!

You may be saying to yourself, “Come on, we don’t like turnover, but it’s not really a monster.” Well, it is significantly more expensive than you think, and it has real, tangible, negative consequences to your business. Let’s talk about the real cost of turnover, and for now, we’ll confine our discussion to hourly employees. 

First, we’re spending money in a variety of ways to attract candidates. When we find a promising one, we have to evaluate them and spend on screening tools. You might do a background check, drug test, personality test, situational judgment test, or something else before even making an offer. Your store or location manager has to devote time to interview the candidate when they could be performing other important duties, such as interacting with customers. You may have to pay overtime wages to cover the open spot in the shift to keep the operation running smoothly. The new employee has to be trained. The training can be very costly and is an absolute necessity, especially if it is a customer-facing role.  Inadequate training can cause all kinds of problems: pricing mistakes, incorrect orders, increased waste due to a lack of familiarity with processes, and the list goes on. You’ll also pay more in unemployment taxes. In many states, employers pay state and federal unemployment taxes on the first $7,000 or so in employee wages. When a new employee comes on board, the tax starts all over again. Terminated employees may file for unemployment, which will adversely impact your UE tax rating from the state.  It’s a lot of small things adding up to one big number.

What does a monster eat?  Profits!

Our company has done a significant amount of research on the cost of replacing an hourly employee, and it’s easy to account for costs totaling $1,500 per hire. This is only including direct costs, as described above. Indirect costs such as lost productivity, reduction in quality, reduced employee morale, and low customer satisfaction drive the total cost up much more.

A few years ago, the Center for American Progress released a report titled, “There Are Significant Business Costs to Replacing Employees.” 1 Based on thirty case studies from eleven published research papers on the costs of employee turnover, the authors concluded that it costs businesses about 20% of a worker’s annual salary to replace that worker. Specifically relating to hourly employees, the ratio was only slightly lower. They reported that the average cost to replace an employee making $30,000 per year was $4,800.

To put this in context, let’s say your company is a retailer with 5,000 employees and your annual employee turnover rate is 60% (the average for a retail business as reported by the Bureau of Labor Statistics). That means you will hire 3,000 replacement employees every year. Just considering the direct costs of $1,500 per hire, that’s a whopping cost of $4.5 million each year. If we rely on the study by the Center for American Progress, that number more than triples to $14.4 million per year. It’s a real cost, but ironically, you won’t find a line item for turnover on your P&L.    

Your employee turnover rate may be higher than the industry averages reported by the BLS. You can do the math to figure out the cost for your own company. But if you don’t know your company’s employee turnover rate, it’s 2020 – it’s time to figure it out.

Hopefully, this discussion will give you something to think about and motivate you to take action. But don’t view it as a problem; it’s really a great opportunity! If you think about your company’s KPIs, such as shrinkage, waste, inventory turnover, average transaction value, and many more, where else can you implement a new process and save your company this kind of money? A ten percentage-point improvement in employee turnover will save hundreds of thousands of dollars every year, maybe millions.  Sound daunting? It’s not really that hard. 

How to tame the monster...

Improving employee turnover starts with a candidate data model. Determine the characteristics and traits that your best producing, longest-tenured employees possess. It could be a number of things such as education, prior work history, personality traits, situational judgment; it could even be the distance from their residence to the work location. It’s not that difficult to figure out if you have the data. But that data must include both candidate data and employee post-hire data. It’s not enough to use only candidate data and automate your current hiring practices. Your current hiring practices may be producing a turnover rate in excess of 100%. Who wants to automate that and make bad hiring decisions even faster? 

Be the Hero!

Armed with a candidate data model, machine learning and augmented intelligence can be harnessed to assess every single candidate with the objective of making only quality hires. Sound good? Your employee turnover will improve, your workforce will be more productive, your customers will be delighted, and you will be the hero who saves your company from the evil turnover monster.

To learn more, download our printable PDF Taming the Hourly Turnover Monster.

  

1 Heather Boushey and Sarah Jane Glynn. ”There are Significant Business Costs to Replacing Employees.” Center for American Progress. 2012. 

Jim Buchanan

CEO