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In business, people come, and people go. Senior staff members depart as entry-level employees arrive. Some workers will head to your competitors or pivot to a new industry. Others will start their own business or drop out of the workforce entirely. Whether you’re eating another goodbye cake or attending another retirement party, it’s all part and parcel of working life. The problem? Even if regular changes don’t cause your overall compensation bill to fluctuate too much, the constant flow of departures is expensive.
This guide describes the financial impact of voluntary and involuntary turnover. We also help you calculate the specific cost of employee turnover in your organization, which you can use as a benchmark to improve employee retention.
Turnover happens when employees leave your company. Voluntary turnover refers to employees who hand in their resignation, while involuntary turnover occurs if you terminate their employment contract. At first glance, your turnover levels may seem fine, especially if you can fill the open roles. For example, some industries, such as hospitality, experience high seasonal turnover but restock roles before the next busy period. But turnover in the corporate world can be costly, both in terms of the upfront costs associated with replacing every vacant position and many other costs “hidden” from the company’s balance sheet.
As a guide, the Society for Human Resource Management estimates that replacing a staff member is approximately 50 to 60% of that employee’s salary, and the cost of a new hire is $4,700.
When an employee leaves the company, it can prompt a wave of mass departures. In voluntary employee turnover, people will be intrigued by what has caused their team members to quit their roles. Some will also experience burnout due to taking on their ex-colleagues’ workloads. And in the case of layoffs, surviving employees often grow distrustful of their leaders. They may worry about the company’s financial stability or the direction their leaders are taking the business in.
In either of these cases, turnover has a snowball effect—the more employees depart, the more others will follow, leading to a never-ending cycle of turnover that can greatly impact the organization’s overall functioning and success.
Consider how the below list of direct and indirect costs associated with employee turnover might impact your organization:
General recruitment costs refer to the upfront costs you’ll pay to third parties and the time it takes your salaried or hourly employees to handle specific hiring tasks. This category includes:
Lost productivity costs the global economy $8.8 trillion each year, the equivalent of 9% of GDP, with employee turnover undoubtedly contributing to this figure.
When employees depart an organization, there’s usually a handover period during which productivity dips. Often, the new hire arrives several weeks or months after the departing employee has vacated their position. But even if you’re able to smoothly hand the baton over from one person to the next, you can expect a gap before the new joiner hits peak productivity.
Here are some of the specific costs associated with lost productivity:
Whether people quit or are laid off, a revolving door of talent undeniably impacts employee morale, which in turn damages employee retention. Although it’s much harder to put a figure on costs associated with employee sentiment, an unhappy team will be less productive and more likely to leave in the future. Here are some of the ways employee turnover lowers morale:
High turnover rates negatively affect how your company is perceived by potential hires and customers, meaning you’re less likely to attract the best talent in the industry. If you’re not hiring candidates with the right skills or experience required to perform the work, this will impact your company financially in the following ways:
As we’ve seen, some employee turnover costs are easy to pin a number to; others require you to dig deep to determine how factors like low mood or poor employer branding financially impact your business. While each company must decide how turnover impacts their operations specifically, the below calculation is a good starting point:
Add the following together to calculate the cost of turnover:
High employee turnover is a business cost that many businesses will want to keep in check. Follow these three simple steps to retain talented employees and keep recruitment costs low.
According to MyPerfectResume’s 2024 Workplace Trends Survey, 69% of people agree or strongly agree that employees will quit in 2024 if they don’t consider their salaries rewarding. On the other hand, when employees feel they’re compensated equitably and fairly for their skills, experience, and the value they bring to the company, their satisfaction and loyalty increase significantly.
In a competitive job market, where skilled professionals have numerous opportunities, offering an attractive salary package is crucial in:
Creating a positive company culture environment where transparency is valued plays a significant role in employee trust and loyalty. Show respect to your employees by:
Employees will leave if they don’t receive the personal and professional support they need from their employer. While comprehensive healthcare and retirement benefits are staples that employees can’t do without, modern benefits packages also offer a breadth of creative perks that can be a game-changer for your retention rates.
A lifestyle spending account is a flexible way to package these benefits; employers fund each individual’s account each month, and employees choose how to spend their allowance on a range of eligible spending categories, such as wellness, professional development, childcare, etc.
Our Benepass Guide to Launching a Competitive LSA outlines how an LSA can lower employee turnover rates in an organization with 1,000 employees. In this example, each person receives $100 per month into their LSA fund at an annual company cost of $1.2 million.
The average turnover rate among U.S. companies between 2022 and 2023 was 17.3%, according to Mercer’s Turnover Study. This drops to 9.7% in organizations that score highly on compensation and benefits (such as those that invest in a flexible LSA). Therefore, we project the following results, based on an annual average salary of $57,200:
Use the calculator below to see the potential impact of an LSA on turnover costs at your organization and assess the value of employee benefits.
Download the complete guide to learn more about the ROI of a flexible LSA program.
Benepass offers a range of customizable benefits loved by employers and employees alike. Along with our employee-led LSA accounts, we also offer:
Ready to save money and minimize disruption in your organization by retaining your best workers? Learn more by booking a free Benepass demo, or contact sales@getbenepass.com to connect with one of our benefits specialists. Also check out our blog on employee retention statistics to learn more about the factors that impact retention and turnover at your organization.
